life insurance initiation 092016

Please see page 23 for rating definitions, important disclosures and required analyst certifications All estimates/forecasts are as of 09/22/16 unless otherwise stated.

Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.

INSUR081516-153338

September 22, 2016

Equity Research

In Need Of A Life Line Resuming Coverage Of Life Insurers Top Picks: CNO, PFG, MET

Source: © istockphoto.com

Insurance

Sean Dargan, Senior Analyst(212) 214-1416

[email protected] Hung, CFA, ASA, Associate Analyst

(212) [email protected]

WELLS FARGO SECURITIES, LLC In Need Of A Life Line EQUITY RESEARCH DEPARTMENT

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TABLE OF CONTENTS

Executive Summary ...................................................................................................................................................................................... 5

Coverage and Ratings Summary .................................................................................................................................................................... 7

Valuation ..................................................................................................................................................................................................... 10

Key Theme 1 – Macro Exposure: Interest Rates and Equity Markets ..................................................................................................... 12

Key Theme 2 – Demographics, the Protection Gap .................................................................................................................................... 15

Key Theme 3 – Curbing Expense Growth ................................................................................................................................................... 19

Key Theme 4 – M&A .................................................................................................................................................................................... 21

CNO Financial Group, Inc. ......................................................................................................................................................................... 23

Principal Financial Group, Inc. .................................................................................................................................................................. 33

MetLife, Inc. ................................................................................................................................................................................................ 43

Torchmark Corp. ......................................................................................................................................................................................... 53

AFLAC Inc. ................................................................................................................................................................................................... 61

Genworth Financial, Inc. ............................................................................................................................................................................ 69

Lincoln National Corp. ................................................................................................................................................................................ 79

Primerica, Inc. ............................................................................................................................................................................................. 89

Prudential Financial, Inc. ........................................................................................................................................................................... 97

Reinsurance Group of America, Inc. ........................................................................................................................................................ 109

Unum Group ............................................................................................................................................................................................... 119

Voya Financial, Inc. .................................................................................................................................................................................... 127

WELLS FARGO SECURITIES, LLC Insurance EQUITY RESEARCH DEPARTMENT

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Executive Summary

We have resumed coverage of eight life insurance stocks with a change in analyst and we have initiated coverage of four other life insurance stocks. Our current group outlook for the life insurance sector is Market Weight, owing chiefly to negative macro headwinds that we think are largely priced in at these levels. Absent a steady rise in long-term interest rates, we will likely continue to see earnings compression until new money rates reach equilibrium with portfolio yields. • Our Outperform rated stocks include CNO, PFG, and MET. • We are Underperform rated on TMK. Having stated that, boards of directors in the industry are unlikely to sit idly as share prices stagnate. Over the next 12-18 months, we have identified four themes we believe investors should focus on as the hidebound life insurance industry tries to reinvent itself: Macro Exposure: Interest Rates and Equity Markets. Not all U.S. life insurers are fungible—

some are much more exposed to interest rate risk through the products they sell than others. While we do not view low interest rates as a capital event in the near term, earnings growth will likely be impeded by low reinvestment rates until new money yields and portfolio yields reach equilibrium.

Demographics, the Protection Gap, and a Changing Business Model. The business model

embraced by some life insurers to achieve growth by selling macro-sensitive savings and retirement products to Baby Boomers is broken, in our view. Baby Boomers are looking for guaranteed lifetime income, and the new normal macroeconomic environment differs from that assumed when those products were sold. At the same time, the “protection gap” has widened and a large swath of the American population does not have basic death protection. We believe life insurers will simplify their product offering, which should make reported financial results more easily understood and believable over time.

Technological Change. Life insurers are famously slow-moving mass employers, which, perhaps in

part, is due to the mutual legacy of some players, has not translated into the aggressive cost cutting of other sectors of corporate America. We believe there are efficiencies of scale to be realized by automation that can improve expense ratios. In addition, on the medical front, we think cancer treatments have the ability to meaningfully improve mortality versus assumptions for in-force books. On the underwriting side, biometrics offer the ability to more accurately segment mortality pricing.

M&A. As U.S. life insurers rationalize their business models, we believe there will be more spin-offs, asset

dispositions, and bolt-on acquisitions. After a lull in activity in 2016, we believe inbound acquisitions from Asia will return to the SMID cap space, as Japanese acquirers have digested the last round of U.S. targets.

While some investors more bullish than us point out that sector valuations are inexpensive on an historical basis when looking at the entirety of the post-demutualization era (from late 1990s to today), when viewed through the lens of the “new normal” of the past ten years, multiples do not seem particularly cheap. Our universe is trading a hair below the 10-year average of 1.05x book value ex-AOCI. On a price-to-forward earnings basis, our universe’s current 10.4x median multiple is higher than the 10-year average of 9.2x, but within one standard deviation.


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Exhibit 1. Historical Median P/BV ex AOCI and Historical Median P/E Ratios Our Universe’s Median P/BV is at the 10-Yr. Average Universe Median NTM P/E Ratio is Above 10-Yr. Avg.

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Source for both graphs: FactSet, company data and Wells Fargo Securities, LLC House view: Underweight Financials, Overweight Insurance (relative to Sector). Wells Fargo Securities Equity Strategist Gina Martin Adams is recommending investors underweight the Financials sector relative to the S&P 500, but relative to other financials, overweight insurance. We note that as a broad industry, “insurance” captures relatively defensive P&C underwriter and insurance broker stocks with lower betas that should do better than the macro-affected life insurance stocks in a lower-for-longer environment. The life insurance sector has always traded at a discount to the broader market on a price-to-earnings basis, and we don’t expect that to change. Life insurance is a low-growth market that should be thought of as growing with GDP. With the P/E ratio of the life sector at 53% of the S&P 500 P/E, it is sitting at one standard deviation below the 10-year average, and we concede that should the Fed embark on a period of tightening, it is likely that the life sector’s P/E ratio will migrate closer to the historical average as market multiples compress. Exhibit 2. Relative S&P 500 LIFE Index price performance and P/E vs. S&P 500 Life Index Has Trailed Broader Index Over 10 Years Life Index Relative P/E One St. Dev. Below 10-Yr Avg.

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Real GDP Growth (right axis) S&P 500 (left axis) S&P 500 LIFE Index (left axis)

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S&P 500 LIFE P/E AS % of S&P 500 P/E

Source for both graphs: FactSet, company data and Wells Fargo Securities, LLC


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Coverage and Ratings Summary Exhibit 3. Ratings and Valuation Ranges

Market 9/22/16 ValuationCompany Ticker Rating Cap Price Range

CNO Financial CNO 1 $2,666 $15.22 $18-$20Principal Financial PFG 1 $14,408 $50.10 $56-$60MetLife MET 1 $49,317 $44.88 $51-$53Voya Financial VOYA 2 $5,845 $29.19 $30-$32Prudential Financial PRU 2 $35,340 $80.87 $82-$86

UNUM UNM 2 $8,367 $35.66 $36-$38Primerica PRI 2 $2,674 $57.53 $58-$60Aflac AFL 2 $30,255 $73.87 $73-$77Lincoln National LNC 2 $11,029 $47.37 $46-$50

Reinsurance Group Of America RGA 2 $6,974 $108.85 $105-$115Genworth Financial GNW 2 $2,472 $4.96 $4-$6Torchmark TMK 3 $7,857 $65.60 $56-$58

Note: Intraday share price and market cap as of September 22, 2016. Source: FactSet, company data and Wells Fargo Securities, LLC estimates Outperform-rated stocks: CNO Financial (CNO, $15.22, Outperform), Top Pick. We think CNO is a well-run life insurer that has made marked progress over the past decade, but whose stock price currently reflects an impact less favorable than our modeled worst-case scenario in a reinsurance recapture situation. The results of an internal audit by CNO into the reinsurance counterparty’s assets should act as a catalyst for the shares, in our opinion. Principal Financial Group (PFG, $50.10, Outperform). PFG is a financial services hybrid life insurer/asset manager/retirement company that has identified niches within those three businesses that we believe are better positioned than the life insurance, asset management, and retirement businesses in general. A lever toward upward estimate revisions will likely be PFG’s Latin American retirement business, where recent headwinds are poised to turn into tailwinds. MetLife (MET, $44.88, Outperform). MET has a catalyst ahead in the separation of the company, which should result in the RemainCo MetLife having an earnings stream and ROE less volatile and less affected by interest rates and equity market movements. We expect the separation of Brighthouse Financial from MetLife to take part in at least two stages starting in Q1 2017, in the form of some combination of IPO, spinoff, and/or exchange offer. We should have more information after MET’s board meets on September 27. Least favorite pick: Torchmark (TMK, 65.60, Underperform). Torchmark’s business model throws off steady midteen ROEs with no equity market exposure and low investment leverage. However, we think the valuation is extremely stretched at more than 2x book value, which we attribute to its takeout premium, a topic that was asked of and acknowledged by management on the Q4 2015 earnings conference call.


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Market Perform-rated stocks: Aflac (AFL, $73.87, Market Perform). Aflac produces roughly 75% of of its earnings in Japan, where it produces stable P&C-like underwriting margins in its cancer and medical insurance businesses. Although we are encouraged by efforts to limit sales of first-sector spread products, we believe negative interest rates will present a problem to the in-force first-sector business in Japan. After a 20+% move upward in the AFL share price year to date (YTD) vs the S&P 500, up 6%, we do not see the current share price as an attractive entry point. Genworth (GNW, $4.96, Market Perform). We think Genworth has an attractive U.S. Mortgage Insurance Business. However, an answer to the existential threats of long-term care and debt service rely too much on a regulatory favor, in our view, for which we have limited insight. Lincoln National (LNC, $47.37, Market Perform). We view the company as a strong domestic franchise characterized by consistent return of capital. In the near term, we think the risk/reward of the stock is balanced with uncertainty related to the negative impacts of the DOL’s fiduciary proposal, as well as the company’s earnings sensitivity to capital market risks. Primerica (PRI, $57.53, Market Perform). We like the company’s business model, as well as its strong earnings growth, high returns on equity, and investment leverage. Still, given the potential risks related to the final fiduciary rules, we think the stock is fairly valued at around 12x forward earnings (which is also its historical average). Prudential Financial (PRU, $80.87, Market Perform). We see the company as a franchise name among global life insurers, with key strengths highlighted by a high-return Japanese business and a dominant market position in large case pension risk transfer. However, the company’s exposure to variable annuities and the uncertainty regarding its SIFI status are keeping us on the sidelines. Reinsurance Group of America (RGA, $108.85, Market Perform). We like RGA’s consistency in results and potential upside related to improving mortality and business rationalization by other carriers. However, we think the risk/reward is fairly balanced at these levels given a shrinking reinsurance market, upcoming management change, and competition in the marketplace. Unum (UNM, $35.66, Market Perform). We think UNM’s focus on mortality and morbidity underwriting is a positive in an environment with continued low interest rates and volatile equities. However, we believe the stock’s risk/reward is balanced in the near term, due to the company’s closed blocks of LTC policies and higher exposure to below IG and energy investments. Voya Financial (VOYA, $29.19, Market Perform). While we believe Voya’s ongoing retirement- and investment-oriented business mix should command a higher valuation multiple, the company’s legacy business should continue to suppress the company’s overall valuation given much lower interest rates.

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9 Exhibit 4 Life insurer comp table

($ in millions, e xc e pt pe r sha re ) 9 /2 2 /16 Ma rke t Ra nk Ra ting Pric e Ca p 15 A 16 E 17 E Curre nt 16 E 17 E 15 A 16 E 17 E Curre nt 16 E 17 E 15 A 16 E 17 E 15 16 YTD

Life Insura nc e1 1 CNO Financial CNO $15.22 $2,665.6 $1.41 $1.36 $1.62 $20.87 $21.57 $22.96 10.8 11.2 9.4 0.73 0.71 0.66 7.3% 6.4% 7.3% 10.9% (20.3%)

2 1 Principal Financial PFG $50.10 $14,408.4 $4.26 $4.40 $4.80 $32.98 $33.90 $36.24 11.7 11.4 10.4 1.52 1.48 1.38 12.6% 13.2% 13.7% (13.4%) 11.4%

3 1 MetLife MET $44.88 $49,317.3 $4.86 $4.56 $5.75 $53.20 $54.39 $58.04 9.2 9.8 7.8 0.84 0.83 0.77 9.6% 8.5% 10.2% (10.9%) (6.9%)

4 2 Voya Financial VOYA $29.19 $5,844.7 $2.92 $3.07 $3.71 $59.44 $62.56 $69.43 10.0 9.5 7.9 0.49 0.47 0.42 5.2% 5.0% 5.6% (12.9%) (20.9%)

5 2 Prudential Financial PRU $80.87 $35,340.2 $10.04 $8.87 $10.29 $76.56 $78.49 $84.50 8.1 9.1 7.9 1.06 1.03 0.96 14.3% 11.4% 12.6% (10.0%) (0.7%)

6 2 UNUM UNM $35.66 $8,367.4 $3.64 $3.85 $4.05 $37.52 $38.91 $41.77 9.8 9.3 8.8 0.95 0.92 0.85 10.6% 10.1% 10.0% (4.6%) 7.1%

7 2 Primerica PRI $57.53 $2,673.6 $3.72 $4.38 $4.90 $23.06 $25.15 $27.48 15.5 13.1 11.7 2.49 2.29 2.09 16.0% 18.2% 18.6% (13.0%) 21.8%

8 2 Aflac AFL $73.87 $30,255.3 $6.16 $6.85 $6.74 $39.32 $41.35 $44.58 12.0 10.8 11.0 1.88 1.79 1.66 19.1% 17.0% 15.7% (1.9%) 23.3%

9 2 Lincoln National LNC $47.37 $11,029.1 $5.44 $6.10 $6.75 $54.66 $57.20 $63.90 8.7 7.8 7.0 0.87 0.83 0.74 10.8% 10.9% 11.1% (12.8%) (5.8%)

10 2 Reinsurance Group Of America RGA $108.85 $6,973.6 $8.43 $9.75 $10.00 $87.33 $91.60 $99.66 12.9 11.2 10.9 1.25 1.19 1.09 10.5% 10.9% 10.5% (2.4%) 27.2%

11 2 Genworth Financial GNW $4.96 $2,471.7 $0.51 $0.88 $0.93 $20.15 $20.58 $21.53 9.7 5.6 5.3 0.25 0.24 0.23 2.5% 4.3% 4.4% (56.1%) 33.0%

12 3 Torchmark TMK $65.60 $7,856.8 $4.21 $4.47 $4.71 $31.11 $33.17 $36.12 15.6 14.7 13.9 2.11 1.98 1.82 14.2% 13.9% 13.6% 5.5% 14.8%

Life Insura nc e Se c tor Me a n 11.2 10 .3 9 .3 1.2 0 1.14 1.0 6 11.0 % 10 .8 % 11.1% (10 .1%) 7 .0 %Life Insura nc e Se c tor Me dia n 10 .4 10 .3 9 .1 1.0 0 0 .9 7 0 .9 1 10 .7 % 10 .9 % 10 .8 % (10 .4 %) 9 .3 %

S&P 5 0 0 SPX 2 ,17 5 .6 7 117 .4 6 115 .5 8 12 6 .2 5 (0 .7 %) 6 .4 %

Ea rnings Pe r Sha re Book Va lue Pe r Sha re Pric e /Book Va luePric e / Ea rnings Ope ra ting ROE Pric e Pe rforma nc e

Note: Intraday share price and market cap as of September 22, 2016. Book value per share and operating return on equity is ex-AOCI. Ratings: 1=Outperform; 2 = Market Perform; 3 = Underperform. Source: FactSet and Wells Fargo Securities, LLC estimates


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Valuation With certain exceptions, our preferred valuation framework for life insurers is based on a price-to-book value (P/BV) multiple. As referenced,, the life insurance industry as a whole is a low-growth sector that may never demand a high price-to-earnings multiple. To the degree that individual company EPS growth is based on macro-sensitive product sales or leverage, the market will likely discount such growth since the true cost of goods sold likely won’t be known until it is too late. We like to think of capital as the raw material of an insurance company, with efficient capital allocation to be rewarded with a premium valuation. As with other capital-intensive financial services sectors, over time there is a correlation between P/BV and return on equity (ROE). For purposes of our analysis, we back Accumulated Other Comprehensive Income (AOCI) from equity, which largely consists of unrealized gains in the investment portfolio. Likewise, we use forecasted operating earnings in calculating ROE, which excludes net realized gains from income. In theory, a company should be trading at book value if it is earning exactly its cost of capital. According to the regression below, that puts the average cost of capital slightly above the 10.0% area. The R-squared of 0.8641 means that 86% of a life insurer’s price-to-book multiple is attributed to expected operating ROE, with the other 14% attributable to other factors. Exhibit 5. Price-to-Book vs. Operating Return on Equity

AFL

AELCNO

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P/B (2016E) vs. 2017E ROE

Source: FactSet, company data, and Wells Fargo Securities, LLC estimates In Exhibit 6 below we calculate cost of equity capital using the Capital Asset Pricing Model (CAPM) for our coverage universe. Inputs include betas over the past year as calculated by FactSet, the 10-year U.S. Treasury yield as the risk-free rate, and an equity risk premium as calculated by Professor Aswath Damodaran of New York University. We note the average cost of equity capital of roughly 10.5% which is close to the implied cost of ROE required to trade at 1x book value in the regression above in Exhibit 5. In recent years, P&C insurers have traded at higher multiples despite lower expected ROEs. We attribute this to lifecos needing a certain interest rate and equity market levels to hit consensus ROE projections in a way that P&C carriers do not.


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Exhibit 6. Cost of Equity Has Come Down Along With Betas and Interest Rates CAPM Components By Company Operating ROE And Cost of Equity

Beta (LTM)

10 yr. UST

Yield

Assumed Equity Risk

Premium

Cost of Equity Capital

AFL 0.94 1.69% 6.06% 7.4%CNO 1.46 1.69% 6.06% 10.5%GNW 2.44 1.69% 6.06% 16.5%LNC 1.79 1.69% 6.06% 12.5%MET 1.50 1.69% 6.06% 10.8%PFG 1.61 1.69% 6.06% 11.5%PRI 1.29 1.69% 6.06% 9.5%PRU 1.62 1.69% 6.06% 11.5%RGA 1.05 1.69% 6.06% 8.0%TMK 1.04 1.69% 6.06% 8.0%UNM 1.37 1.69% 6.06% 10.0%

VOYA 1.43 1.69% 6.06% 10.3%AVERAGE 1.46 10.5%

6%

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05 06 07 08 09 10 11 12 13 14 15 16E

ROE CofE

Source for table and graph: FactSet, NYU (http://pages.stern.nyu.edu/~adamodar/) and Wells Fargo Securities, LLC estimates


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Key Theme 1 – Macro Exposure: Interest Rates and Equity Markets Interest rates. Life insurers collect premiums associated with policies (liabilities), and invest those premiums largely in fixed income instruments (assets). The goal of a life insurance company investment portfolio is not total return, but rather, asset-liability matching (ALM). Insurers have an assumption-based business model; that is to say, profitability is a measure of actual experience versus assumptions embedded in product pricing. In addition to assumptions around mortality, morbidity, and policy lapse rates, insurers make assumptions around investment returns. Needless to say, interest rates are now materially lower than assumed when long-tail products like life insurance and long-term care were sold decades ago. Exhibit 7. US Life Insurance Industry Portfolio Yields Continue to Compress

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20022003200420052006200720082009201020112012201320142015

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Source: SNL and Wells Fargo Securities, LLC While in theory, if assets and liabilities were perfectly matched, there would be no problem, in reality, assets and liabilities are never perfectly matched and the companies are exposed to reinvestment risk. Lower interest rates have manifested themselves on the interest statement in the form of lower net investment income and compression in spread income in products like fixed annuities. On the balance sheet, low interest rates have led to write-downs of goodwill and deferred acquisition cost (DAC) balances, followed in some cases by strengthening of GAAP and ultimately, statutory reserves. Essentially, while recent central bank policy has benefited equities valuations in general, low interest rates have impaired the life insurance business model. Exhibit 8. Life insurer multiples have been closely correlated with 10-yr UST yields

Exhibit 9. Wells Fargo Economics Group Is Not Forecasting a Snap Back in UST 10-Yr Yields

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Source: FactSet and Wells Fargo Securities, LLC Source: FactSet and Wells Fargo Securities, LLC estimates


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While life insurance stocks as a group would react favorably to a rise in interest rates (assuming a parallel shift in the yield curve), investors who have played life stocks as a way to benefit from rising rates have been disappointed several times in the post-crisis era. Given our Wells Fargo Economics Group house view of the U.S. Treasury 10-year yield rising only to 1.73% at the end of 2017E, after one Fed Funds hike in 2016 (December), followed by two more in 2017E, we believe investors have to take an interest-rate agnostic view when looking at the sector. If one assumes a lower-for-longer interest rate environment, which we increasingly think has become the census view, the sector should continue to underperform the market. However, there are individual stories that should work for reasons apart from interest rates Exhibit 10. Not All Life Insurers are Highly Leveraged To Investments ($ in millions, unless otherwise noted, as of June 30, 2016)

PRU LNC MET RGA VOYA PFG AFL Avg CNO GNW UNM TMK PRIInvestments 411,944 110,587 543,511 45,761 99,192 76,687 122,283 26,157 74,147 53,114 16,049 2,246Total Equity, excl AOCI 33,991 12,725 64,741 5,595 12,926 10,587 17,118 3,678 11,921 8,817 3,889 1,144 Invested Assets/Equity Leverage 12.1x 8.7x 8.4x 8.2x 7.7x 7.2x 7.1x 7.1x 7.1x 6.2x 6.0x 4.1x 2.0x

Source: SNL and Wells Fargo Securities, LLC Equity markets: The Wells Fargo Securities 12-Month Fair Value Estimate for the S&P 500 is 2,200, implying only 0.9% potential upside. Our house forecast does not leave us bullish on asset management businesses or variable annuities in the near term. For companies with equity asset management businesses (PFG and to a lesser extent, PRU), lower equity markets translate into lower average assets under management, in turn, leading to lower fee income and earnings headwinds. For variable annuity carriers (LNC, PRU, and METs’ Brighthouse Financial unit), lower equity markets mean not only lower FAS 97 fees charged against average assets under administration, but higher levels of in-the-money guaranteed benefits, which can lead to reserve strengthening. Variable annuity hedge programs have proven to sometimes suffer from basis risk, and volatile equity markets increase the cost of hedging (although, as seen below in Exhibit 11, movements in swap interest rates have a greater impact on the cost of hedging). Generally speaking we do not view insuring high water marks of equity mutual funds to be a business in which life insurers should be engaged. Exhibit 11. Hedge Costs Have Risen Even As Volatility Has Subsided, Due to Swap Interest Rates

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Source: Bloomberg, FactSet and Wells Fargo Securities, LLC The impact of the macro is not hypothetical. For the stocks within our universe, 2016 EPS estimates have been cumulatively downwardly revised by 8% over the past 12 months, with the majority of the downward movement occurring before companies reported Q1 2016 earnings. The spread of the revisions has not been uniform: predictably, companies with business models less tied to macro drivers have fared better. But still, only three companies (AFL +8.2%, PRI +5.2%, and RGA +1.6%) have seen consensus estimates upwardly revised. The most negative revisions were experienced by MET (-27.2%), GNW (-20.7%), PRU (-16.1%) and VOYA (-15.8%).


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Exhibit 12. Macro Impact Has Led to Negative Estimate Revisions

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-4.0%

-3.0%

-2.0%

-1.0%

0.0%

Sep'15

Oct'15

Nov'15

Dec'15

Jan'16

Feb'16

Mar'16

Apr'16

May'16

Jun'16

Jul'16

Aug'16

Sep'16

Cumulative WFS Life Insurance Universe 2016E EPS Revisions

Source: FactSet and Wells Fargo Securities, LLC


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Key Theme 2 – Demographics and the protection gap If we had written this report 20 years ago, we might have highlighted the growth potential of the industry primed by Baby Boomers in their peak accumulation years buying variable annuities, which were not yet wrapped by guaranteed living benefits. Fast forward to today, when the known drawbacks of the variable annuity product (equity market sensitivity, capital strain, hedging costs, basis risk) are joined by the first credible experience studies of policyholder behavior, and it is safe to say the market no longer rewards growth in variable annuities. In the United States, the Baby Boomers are retiring and the business model of some large-cap life insurers that was predicated on selling them macro-sensitive retirement products seems like an exercise in value destruction (real or imagined). The protection gap. The protection gap is the difference between the resources someone has (life insurance and savings included) and the amount of insurance necessary for the dependent to maintain living standard after the death of the primary provider. For purposes of this report, we consider only the working population with dependents. Over the past 30 years, growth in the U.S. life insurance sector has been fueled by the Baby Boomers and their desire to accumulate assets. Unlike the generations before them, many Baby Boomers are concerned about the risk of outliving their savings, rather than dying too early. Variable annuities, defined contribution retirement plans, and other accumulation products offered by life insurers provided Baby Boomers with a means of protection against the risk of living too long and a stream of income for a few years or a lifetime. These products are now reaching the maturity phase and are no longer growth engine products. Exhibit 13. Protection gap is growing in the United States

INCOME NEEDED TO MORTALITYMAINTAIN PROTECTION

LIVING STANDARD GAP

SAVINGS

LIFE INSURANCE

Source: Wells Fargo Securities, LLC The age 65+ population is growing faster than the working-age population. In addition, life expectancy has increased from 12.5 years after 65.0 to 20.6 years for women and 18.1 years for men in 2014, according to Swiss Re. As the waves of the Baby Boomers enter retirement, the U.S. contends a financial challenge in funding programs such as Social Security. Many Americans are unprepared for retirement and are relying on Social Security and Medicare to aid health care costs. How did we get here? Before the 1980s, life insurance agents commonly would go door to door to reach middle class Americans and raise awareness on the affordability of basic life insurance products offered. Ownership of life insurance policies have reached all-time lows in the United States since 1960. According to LIMRA, in 1960, 59% of the adult population in the United States owned life insurance, and the number has since fallen to 36%. Since the mid-1980s, the U.S. life industry has experienced a decline in life insurance policies by roughly 45%. Since the Financial Crisis, new business and life policies sold have declined at an annual rate of 5% with inflation adjustments, and American households without coverage of any kind increased from 22% to 30% between 2004 and 2010, according to LIMRA, following a two-decade decline in sales capacity. Americans are increasingly vulnerable to potentially heavy expenses as a result of underinsurance.


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Exhibit 14. An Aging Population Has Different Needs

0

50

100

150

200

250

300

350

400

450

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Pop

ula

tion

(M

illio

ns)

65 years andover18 to 64 years

Under 18 years

Retirees fastestgrowing segment

Source: U.S. Census Bureau and Wells Fargo Securities, LLC

Expense of carrying a career sales force. In the 1980s, Life insurance companies moved away from investing in agents in an effort to cut the cost of carrying a career sales force. According to LIMRA, in 2004, there were 161,955 U.S. agents, and over the course of just three years that number fell by more than 11,000. In the face of high fixed costs, life insurers cut back on sales expenses to improve top line growth and shifted sales to third parties, which include financial advisors and registered representatives. The two-decade decline in sales force has weakened marketing campaigns of life insurance products to the mass market. Emergence of term life. As inflation climbed in the 1970s and ate into the relative attractiveness of participating whole life, and tax law changes in the early 1980s tightened up the criteria for tax-advantage treatment of whole life, the workhorse participating whole life policy lost its luster. Term life, a basic and affordable protection plan directed to appeal to the mass market, took off in popularity. Term life tended to have thin margins, so life companies had to focus on selling as many policies as possible to drive growth. Life agents struggled to make a career out of selling these pure protection products and saw an opportunity to specialize in high face value whole life or universal life, which were aimed primarily at affluent families and produced favorable commissions.

Shift to retirement and savings products. In the 1990s, asset accumulation products were considered to be “growth” products, not without cause. In 1994, the year-over-year change in annuity sales was +300%. The increase in annuity sales coincided with a shift in middle class financial habits. The mass market began investing, and mutual funds and 401(k)s gained popularity. The demand for term-life insurance policies and pure life products has since softened in the United States. Since 2014, more than half of the Statutory operating income of U.S. life insurers has been derived from annuity-based products, and premiums and deposits have overtaken life insurance as the top-line driver of earnings. The recent widening of the gap reflects the industry’s adaption to the Baby Boomers’ financial needs and the steering away from traditional life insurance products toward lifetime income strategies. Demutualization and IPOs. In the mid-1990s to early 2000s, several large life insurers demutualized, including John Hancock, MetLife, Prudential Financial, and Principal. The organizational structure changed from mutuals where the policyholders were the owners, to a stock company. Shareholders seeking a return on their investment put pressure on the insurers to increase the value of their stake. The strategy to drive growth became more about selling volatile and riskier products, such as variable annuities with higher margins and less about selling pure life products in bulk. In the 1990s, the growth of sales in retirement products and annuities in the United States, coupled with strong equity markets, produced high short-term earnings, and these products became primary drivers of top-line growth. Strong competition resulted in product features that increased exposed carriers’ capital to equity market risk.


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Socioeconomic factors. Other socioeconomic factors have contributed to the decline in mortality protection. The perceived high cost of life insurance products and lack of funds has deterred the middle class from purchasing life insurance products. The recession and decline in household income has decreased consumer spending. According to a Swiss Re report, households with a primary breadwinner younger than 55 saw a decline in real terms by 12% from 2001 to 2010 and this percentage dipped even further for the age group as a whole, a consequence of the housing bubble bursting and the global financial crisis. Lower investment returns, decreased financial assets, and rising debt levels have made reaching the same living standard even more challenging for Americans. Back to the future? In our view, the U.S insurance industry has been ineffective in relaying the message to the mass market the need for pure life products the past three decades. Although we believe the industry has done a sufficient job convincing employers to package their life products in employee benefits, generating a distribution channel to serve the broader market, Americans now see buying insurance on their own to be unnecessary. Americans tend to overlook the fact that employer-provided coverage lasts only so long as one has a job and payouts remain relatively small in comparison to individual policies. It is well documented that many Americans tend to overestimate the cost of insurance. The industry’s focus on selling retirement plans to affluent Americans has only reinforced this misconception, and the smaller sales force, together with the focus on investment and retirement products, have proven to further detach the industry from educating the mass market. Interestingly, term-life cost in the United States has fallen significantly and the product is cost effective. Yet we see fewer and fewer pure life protection policies being bought each year. The lack of consumer education about pure life insurance products unveils a potential opportunity for the U.S. life companies to close the gap and reach their unmet potential. We think the detritus from the global financial crisis and the sustained low interest rate environment is forcing a change in the business model for many life insurers, including a move away from variable annuities. Exhibit 15. Fixed Annuity Sales > Variable Annuity Sales For First Time Since 1995

0

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200

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300

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H2016

$ in

Bil

lion

s

Fixed Variable

Source: LIMRA and Wells Fargo Securities, LLC Variable Annuities: Need more reasons not to like them? Policyholder behavior and capital and reserve requirements not trending favorably. While we acknowledge the benefits of variable annuities from the standpoint of the consumer and we generally agree with carriers that a well-designed hedge program mitigates risks to economic capital, we believe the product introduces too much volatility to the GAAP and statutory financial results. The complexity of the product design and the opaqueness of the capital and reserving requirements have clearly weighed on the valuation of carriers who sell variable annuities. We identify several headwinds: Companies are only now gathering credible experience around policyholder behavior. Our

impression is that the industry benefitted for years from a policyholder base that did not always act in a rational manner. Even when policyholders were sitting on in-the-money guarantees, at the end of a seven-


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year surrender period they were churned into a new contract, which incidentally, created a commission payment to their financial advisor or broker. During the VA arms race of the 1990s and 2000s, it could perhaps be argued that newer, more generous benefits in the marketplace justified an exchange. As we have seen in other long-tail products, elevated lapsation rates were assumed in product pricing. Now that credible experience is emerging from variable annuities sold at the height of the pre-crisis arms race, it appears that policyholders are increasingly acting in their economic best interest and not only lapsing less frequently, but utilizing the living benefits at a higher rate than assumed in pricing. In our view, the canary in the coal mine should have been Voya’s $1.5 billion charge in 2011 related to lower-than-expected lapsation and higher utilization in the closed block of variable annuities (as part of ING). In 2Q16, MET took an after-tax charge to net income of $2 billion to a VA assumption review. While a large portion of the charge was a non-cash charge related to a change in accounting from insurance to derivative fair value accounting, the base cause was that policyholders were utilizing dollar-for-dollar withdrawals of account value of the guaranteed minimum withdrawal benefit (GMIB) at a higher rate than assumed. On the other hand, PRU released reserves after updating utilization assumptions in 2016. The problem from a portfolio manager’s point of view is that it is impossible to know what a company’s original assumptions were and how experience is trending. We suspect the s-1 filing of MET’s NewCo Brighthouse Financial later in 2016 may spur other carriers to provide more detail on policyholder behavior assumptions.

Capital and reserving requirements appear to be getting more onerous. On August 19, 2016, consulting firm Oliver Wyman released a report commissioned by the National Association of Insurance Commissioners (NAIC), which was looking to remove or mitigate motivation by carriers to use captive reinsurance. In particular, the interplay between requirements of Actuarial Guideline 43 (“AG-43”) for VA reserving and C3 Phase 2 stochastic modeling for computing market risk and interest rate risk associated with variable annuities in risk-based capital (RBC) has introduced complexity in to statutory balance sheets and driven carriers to employ the use of captives.

The five proposals are heavy on actuarial jargon, but one that is attracting attention is the call to use Conditional Tail Expectation (CTE) 98 in the C3 capital calculation, which would require companies to assume the average of the worst 2% of interest rate scenarios when establishing capital requirements. All else being equal, those companies using CTE 95 (average of the worst 5%) or CTE 97 (average of the worst 3%) would need to hold more capital against VA because more conservative interest rates assumptions would be used. But, as is often the case in life insurance, all things (assumptions) are not the same and a company using CTE 95 could have more conservative assumptions around other inputs than a company using CTE 98 interest rate assumptions.

If U.S. life insurers ever fall under jurisdiction of Federal or International regulators,

variable annuities will likely be treated more punitively. On June 3, the Federal Reserve released an advance notice of proposed rulemaking inviting comment for capital standards for insurance Systemically Important Financial Institutions (SIFIs) and also proposed a rule to apply enhanced prudential standards to insurance SIFIs. Of particular interest in the prudential standards as applied to variable annuities is the Fed’s position on the short-term liquidity risk associated with derivatives hedging, and a proposal that separate accounts are to be factored into cash flow testing.

Independently of the Fed’s move toward regulating large U.S. insurers is the movement of the International Association of Insurance Supervisors (IAIS) to designate Global Systemically Important Insurers (GSII). Under the IAIS proposed assessment methodology, variable annuities are classified as non-traditional insurance products driving the systemic important of insurers, thus requiring more capital.

Proposed accounting changes may result in more reserve strengthening. The Financial

Accounting Standards Board (FASB) is working on an insurance project it is calling “Targeted Improvements to the Accounting for Long-Duration Contracts.” Since the mid-2000s, guaranteed minimum death benefits (GMDB) have been classified as a nontraditional long-duration contract for which SOP 03-1 allows reserving on an accrual (insurance) basis. We believe that FASB will change course and require GAAP reserves for GMDB to be accounted for under derivative fair value rules in the same manner as Guaranteed Minimum Withdrawal Benefits (GMWB). A similar shift in GAAP accounting by MetLife for its GMIB reserves in 2Q16 caused a meaningful non-cash reserve strengthening. We believe investors should brace themselves for an industrywide hit if FASB does change the rule since a GMDB has been standard on most contracts sold over the past 20 years, as well as the introduction of more volatility to the balance sheet.


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Key Theme 3 – Curbing expense growth: FinTech Goodbye, Mother Met. In another era, insurance companies were known as maternalistic employers, with company nicknames to match. While the industry has been more bottom-line focused since at least the late-1990s demutualization era, expense saves have taken on new urgency in the post-crisis era as revenue growth slows. As the period of extended low interest rates drags on, life insurers have adjusted by raising pricing on new business to attain acceptable margin on new product. With limited ability to raise premium rates on in force business (until claims-paying ability is compromised, as in the case of long-term care), life insurers have been forced to cut expenses as a way mitigating margin degradation on in force business. We present announced expense save programs in the space below in Exhibit 16. Exhibit 16. Announced Expense-Save Initiatives

Ticker Expense-save Initiatives

CNO Decline in OCB policies requred careful management of expenses.

GNW Reduced US Life and HQ cash expenses by $150 million

LNC Budgets expense growth 1% to 2% less than revenue growth

MET $1 billion in run-rate expense savings by the end of 2019

UNM

"Focus on disciplined expense management" contributed to 100 bps expense ratio decline in 2Q16

VOYA "Proactive" expense management program

Source: Company data and Wells Fargo Securities, LLC Automation. We believe there is meaningful room to improve expense ratios in the industry. Cutting head count alone will likely not be an end to itself in the quest to expand returns. Thus far, the insurance industry has been a laggard in using fintech, in part due to dependence on clunky mainframes to service decades’ worth of in force business. More immediate improvement will likely be realized in the application of fintech to efficiently source new business, the process of which often includes mailing paper applications and collecting bodily fluid samples. Data analytics making use of items like credit scores are transforming mortality underwriting. Ultimately, we would not rule out a shift of retail life insurance and annuity sales away from legacy carriers to technology companies, perhaps with some back-end underwriting expertise provided by reinsurers. We believe RGA is positioned to leverage its expertise in mortality underwriting to “white label” life insurance sold on the front end by a technology company. Exhibit 17. The Proportion Of FinTech Funding Going To Insurance Is Rising

56% 48%64% 67%

46%

3% 4%

4%7%

12%

9% 14%

13%8%

18%

14%10%

3%9%

11%

18% 14% 16%9% 13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

FinTech Funding By Financial Industry Subsector

Transaction andPayment Services

Investment Services

Insurance

Capital Markets

Banking Services

Source: PWC and Wells Fargo Securities, LLC


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Immuno-oncology (IO) and mortality. Advancements in specific treatments of cancer are progressing at a faster rate than many insurance-specific investors realize. Immuno-oncology has the potential to keep cancer patients alive longer. By extending the lives of cancer patients, these drugs should have a favorable impact on mortality over time. The mortality assumptions used by life insurers are based off of actuarial tables that are by definition backward looking. Generally, there has been a one-way trend in favorable mortality that has aided life insurers’ earnings over the decades. The Commissioners Standard Ordinary (CSO) Mortality Table is a tool developed by the Society of Actuaries (SOA) and American Academy of Actuaries (Academy). Currently, the SOA and the Acedamy are finalizing a 2017 CSO at the request of the American Council of Life Insurers (ACLI) since experience studies have shown “significant improvement in the mortality rates experienced by the industry from that underlying the 2001 CSO table development.” Prior to the 2001 CSO that was adopted by the National Association of Insurance Commissioners (NAIC) in 2006, the last CSO table was from 1980. At a basic level, the CSO table assigns a life expectancy at each age for males and females. Tables have historically been used in establishing premium rates, and calculating reserves. A new table also impacts buyer and agent behavior since IRS rules around what qualifies as insurance vs. investment take into account statutory-defined life expectancy. A real benefit to life insurers would come if cures were developed for cancers that typically affect people in the 30s, 40s, and 50s. If a statistically significant number of policyholders in those age groups continued to pay premiums above and beyond what was assumed in pricing and reserves, insurers would experience better-than-expected mortality results on in-force business. According to statements made at a 2016 investor day, RGA President (and future CEO) Anna Manning, death claims from cancer make up 30-40% of RGA’s total claims in a typical year and represent the leading cause of insured death because underwriting has gotten better at screening for cardiovascular disease. If we assume that cancer deaths make up 30% of RGA’s book (the low end of the range given), and IO drugs add an extra 5 years to cancer patients life expectancy, that adds an additional 1.5 years (30% x 5) of life expectancy to RGA’s book. Current CEO Greig Woodring quantified the effect one additional year of life expectancy would have on the earnings profile as being equal to approximately one year’s annual premium, or about $7 billion, versus RGA’s market cap of $7.0 billion.


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Key Theme 4 – M&A Logically, there should be consolidation. According the American Council of Life Insurers (ACLI), there were 830 statutory life insurance companies at the end of 2014, owned by more than 200 groups, many of them mutual or fraternal organizations. It stands to reason that in a fractured low-growth industry facing a secular headwind, there should be consolidation. However, we have not seen a publicly traded U.S. life insurer buy another U.S. publicly traded life insurer in 11 years. Post-crisis, whole-company M&A has been infrequent, but when it has happened, transactions have been marked by SMID cap targets, foreign (i.e., Japanese) buyers, and premium multiples. (Please see Exhibit 18 for more detail.) Exhibit 18. Japanese Buyers Have Paid Largest Premiums Over the Past Five Years

Announcement Deal P/BV RationaleAcquirer Target Date Size multiple*

Anbang Insurance Group Co., Ltd. Fidelity & Guaranty Life 11/9/2015** $1.6B 1.1x Enhance the growth of Anbang's business, move capital out of ChinaNassau Reinsurance Group Holdings L.P. The Phoenix Companies 9/29/2015 $217MM 0.5x Nassau's first life insurance acquisition; to become the company's U.S. life and

annuity platform for future growthSun Life Financial Inc AIZ Employee Benefits Biz 9/9/2015 $940MM The deal should create a domestic benefits business that will rank sixth in market

share as measured by revenueSumitomo Life Insurance Symetra Financial 8/11/2015 $3.8B 1.6x Symetrais to become Sumitomo Life’s platform in the U.S., where Sumitomo Life

does not currently have a material operational presenceMeiji Yasuda Life Insurance Co StanCorp Financial Group 7/23/2015 $5.0B 2.2x Expands the scope and quality of Meiji Yasuda’s offerings in the U.S. market, should

help to enhance/accelerate its diversification and international growthJ.C. Flowers & Co. LLC AmeriLife Group, L.L.C. 6/5/2015 $390MM Private equity firm dedicated to investing in the global financial services industry

Pan-American Life Mutual Holding Company Mutual Trust Holding Company 4/8/2015 NA Strengthen combined company's position as a premier life, accident and health

insurance provider in the AmericasManulife Financial Standard Life Investments Inc. and

Standard Life Financials Inc 9/3/2014 $4.0B Increase presence in Quebec

Tiptree Financial Inc Fortegra Financial Corp 8/12/2014 $209MM 1.2x Tiptree is a diversified holding company that actively acquires new businesses

Dai-ichi Life Insurance Company, Protective Life 6/3/2014 $5.7B 1.7x Protective Life to be the company's strategic growth platform in the North American region

GreyCastle Holdings XL Life Reinsurance 5/1/2014 $570MM Expand reinsurance business

Canada Pension Plan Inv. Board (CPPIB) Wilton Re Holdings Ltd 3/21/2014 $1.80bn CPPIB plans to use the asset as a platform for further U.S. expansion into closed-

block life insurance, (non-correlated risk)TPG Capital Management LP The Warranty Group 3/21/2014 $1.50B Private equity firm specializing in venture capital, growth capital, public equity and

debt investmentsWilton Reassurance Co Conseco Life Insurance Co 3/3/2014 $237mm Continued track record of acquiring seasoned blocks of business

Beechwood Re, Ltd. CNO Financial closed block LTC 2/12/2014 $590MM Expand reinsurance business

Wilton Re Holdings Limited Continental Assurance Company 2/10/2014 $615mm Expand payout annuity business

Global Atlantic Forethought Life 9/26/2013 NA Acquire annuity distribution and preneed business

Resolution Life Lincoln Benefit Life Company (Allstate) 7/17/2013 $600MM Acquire life ins biz in the US; focus on needs of existing customers rather than seek new sales

Berkshire Hathaway Hartford Life International 6/27/2013 $285MM Expand life insurance business

Global Atlantic Accordia Life 5/1/2013 NA Expand life insurance business via former Aviva U.S. life operation

Madison Dearborn Partners, LLC National Financial Partners 4/14/2013 $1.28B Expand growth in wealth management industry

Protective Life MONY Life Insurance Company 4/10/2013 $1.06B Capital efficiency

MetLife AFP Provida S.A. 2/1/2013 $2.0B 3.0x Capitalizing on pensiongrowth opportunities in emerging markets

Athene Holding Ltd. Aviva USA Corp 12/21/2012 $1.55bn Growth of retail sales and reinsurance operations; Focused on becoming leading U.S. fixed annuity company

Guggenheim Partners Sun Life Assurance Company of Canada 12/17/2012 $1.35B Growth in annuity biz (primarily variable annuities)

Principal Financial Group AFP Cuprum S.A. 10/8/2012 $1.51B Broaden presence in the voluntary Chilean pension markets

Prudential Financial Hartford Financial's Individual Life Ins 9/27/2012 $615MM Provide greater scale, enhanced product offerings and expanded distribution

Massachusetts Mutual Life Ins Hartford Financial Services Group 9/4/2012 $400MM Expand retirement services division

Torchmark Family Heritage Life Ins Co of America 7/31/2012 $218.5MM Grow in supplemental health insurance line of business

Athene Group Ltd. Presidential Life Corporation 7/12/2012 $414.3mm 0.7x Growth of retail sales and reinsurance operations

Prudential Plc SRLC America Holding Corp. 5/30/2012 $621MM Increase the scale of life business

Tokio Marine Delphi Financial Group 12/21/2011 $2.7B 1.5x Strengthen P&C presence; expand into life

Guggenheim Capital LLC EquiTrust Life Insurance Company 10/6/2011 $440MM Grow presence in the annuity and life insurance arena

Average 1.5x *For publicly traded, whole-company targets only. Book value excludes AOCI. Source: SNL, Wells Fargo Securities, LLC SNL DISCLAIMER: SNL FINANCIAL LC. CONTAINS COPYRIGHTED AND TRADE SECRET MATERIAL DISTRIBUTED UNDER LICENSE FROM SNL. FOR RECIPIENT’S INTERNAL USE ONLY.


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We are not holding our breath waiting for M&A among large-cap life insurers. For one thing, depressed multiples mean large U.S. life insurers do not have the currency to make accretive acquisitions. In addition, companies are not eager to double down on variable annuities and universal life with secondary guarantees, particularly when they didn’t underwrite the products. European companies who found the United States a target-rich environment in the 1990s are beset by their own problems and Solvency II capital requirements make doing business in the United States more difficult than in past eras. Given the difficulty Anbang has had in closing its announced acquisition of Fidelity & Guaranty Life, we don’t see a wave of incoming M&A from China anytime soon. Japan M&A taking a breather. After a 16-month period in 2014-2015 in which three publicly traded U.S. life insurers were sold at significant premiums to Japanese acquirers in deals amounting to $14.5 billion (see Exhibit 18), the pipeline has slowed. The reasons behind outbound M&A from Japan have been well reported: other developed markets, including the United States, offer higher growth and higher returns than no-growth Japan, which is characterized by single-digit ROE in the insurance industry. Seen through the lens of Japanese companies, acquisition multiples well in excess of trading multiples are easier to justify since lower returns in their home markets can make the acquired businesses ROE accretive and a lower cost of capital translates into a lower hurdle return rate. Outbound M&A from Japan, Inc. has slowed sharply in 2016. Based on commentary we heard at the 2016 Association of Insurance and Financial Analysts (AIFA), it seems that the three buyers in the 2014-2015 time frame are taking time to digest their purchases. We have seen slow steps to re-engage: in August, Dai-Ichi used Protective as a platform to acquire non-life warranty provider United States Warranty Corporation. In our opinion, the next large acquisition is likely to be made by mutually owned Nippon Life, which is the second-largest Japanese life insurer behind Japan Post. In 2015, Nippon said it was looking to spend up to US$13.5 billion on outbound M&A. Nippon made a US$1.7 billion acquisition of an insurance unit of an Australian bank in 2015, but indicated earlier this year that it is still hunting for targets. Disclaimer The external website links included in this publication are not maintained, controlled, or operated by Wells Fargo Securities. Wells Fargo Securities does not provide the products and services on these websites and the views expressed on these websites do not necessarily represent those of Wells Fargo Securities. Please review the applicable privacy and security policies and terms and conditions for the website you are visiting.

WELLS FARGO SECURITIES, LLC CNO Financial Group, Inc. EQUITY RESEARCH DEPARTMENT

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CNO Financial Group, Inc. CNO: Initiating Coverage With An Outperform Rating Recapturing Lost Value Summary: We are initiating coverage of CNO Financial Group, Inc. (CNO)

with an Outperform rating and a valuation range of $18-20. Our EPS estimates are $1.36 for 2016 and $1.62 for 2017. In our opinion, CNO’s trading multiple should expand in the near term as the market reacts to incremental information related to its long-term care reinsurance transaction with Beechwood Re.

Reaction overdone. CNO’s per share price has declined by roughly $5 since May 31 (-25% vs. S&P 500+3.9%). In July, news reports surfaced of links between Beechwood Re Ltd. (Beechwood), and hedge fund Platinum Partners, which is under federal investigation. Beechwood reinsured CNO’s closed block long-term care business in 2014. Our worst-case scenario in a Beechwood reinsurance recapture scenario only implies a $2 per share hit to BVPS.

The math. If we apply a price-to-book multiple of 0.85x (one standard deviation below the three-year average) to a worst-case forward book value estimate $2 per share lower than our current Q3 2017 estimate of $22.57, we still get to an equity valuation of $17.48, implying the market has overreacted to the Beechwood news.

Our base case points to continued share repurchase. If Beechwood cannot collateralize the reserve trust due to losses in Platinum Partners funds, CNO would recapture the reserves and associated long-term care liabilities. CNO is in the process of auditing $126 million of assets in the trust, which we assume will be impaired and trigger a recapture. Including the mark-to-market impact on liabilities to reflect low interest rates, we think the Q3 after-tax charge would be around $100 million, or $0.64 per share. After factoring in the reversal of capital relief and assuming higher capital charges for remaining trust assets, we expect CNO’s excess capital would decline to about $275 million ($125 million deployable) from $375 million ($225 million deployable). Still, CNO would be in a position to continue share repurchase.

No equity raise is required even in our worst case. In our worst case we assume all $302 million of Level 3 assets in the Beechwood trust will be impaired, with a Q3 net charge of about $1.29 per share. We estimate the net draw down on holdco excess capital would be around $250 million, which would wipe out CNO’s deployable excess capital. As a result, in a worst case we think CNO could suspend its share repurchase, or potentially access debt markets to fill any capital holes, but we don’t see any need for equity.

Q3 2016 preview. We believe there is a high probability of CNO valuing the assets in the Beechwood trust at below 107% collateralization, which puts Q3 2016 consensus of $0.37 at risk, but the market has already priced in a recapture.

Valuation Range: $18.00 to $20.00 from NE to NE Our range is based on applying a 0.9x multiple to our Q3 2017E book value estimate of around $23 per share ex. accumulated other comprehensive income but including potential asset impairment charges related to Beechwood Re. Risks to our range include adverse mortality, credit losses, and falling interest rates. Investment Thesis: We rate CNO shares Outperform. We like the company's fundamentals, potential for ROE expansion, and cash tax benefits. We think its price multiple should expand in the near term as the market has priced in an overly pessimistic outcome related to its long-term care reinsurance transaction with Beechwood Re.

Outperform

Sector: Life Insurance

Market Weight

Initiation of Coverage

2015A 2016E 2017E EPS Curr. Prior Curr. Prior Q1 (Mar.) $0.30 $0.27 A $0.34 Q2 (June) 0.31 0.35 A 0.41 Q3 (Sep.) 0.30 0.35 0.42 Q4 (Dec.) 0.52 0.39 0.45 FY $1.41 $1.36 $1.62 CY $1.41 $1.36 $1.62 FY P/EPS 11.0x 11.4x 9.5x Rev.(MM) $3,858 $3,922 $3,986 Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful V = Volatile, = Company is on the Priority Stock List

operating EPS FY 2015 EPS impacted by timing of share repurchase

Ticker CNO

Price (09/22/2016) $15.46 52-Week Range: $14-21 Shares Outstanding: (MM) 175.1 Market Cap.: (MM) $2,700.0 S&P 500: 2,179.49 Avg. Daily Vol.: 1,564,850 Dividend/Yield: $0.32/2.1% LT Debt: (MM) $912.0 LT Debt/Total Cap.: 19.9% ROE: 7.0% 3-5 Yr. Est. Growth Rate: 10.0% CY 2016 Est. P/E-to-Growth: 1.1x Last Reporting Date: 07/26/2016

After CloseSource: Company Data, Wells Fargo Securities, LLC estimates, and Reuters


sean .dargan@wellsfargo .comKenneth Hung, CFA, ASA, Associate Analyst

(212) 214-8023kenneth .hung@wellsfargo .com


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Investment Thesis We think CNO’s intrinsic value in the long run is well supported by the company’s potential for ROE expansion, its strong distribution network, and incremental cash tax benefits associated with the company’s non-life net operating losses. In our opinion, CNO’s trading multiple should expand in the near term as the market reacts to incremental information related to its long-term care reinsurance transaction with Beechwood Re. Valuation CNO shares have declined roughly $5 per share since the beginning of June. Our worst-case scenario in a recapture scenario only implies a $2 per share hit to book value per share (see Exhibit 3 on the following page for more detail). If we apply a price-to-book multiple of 0.85x (one standard deviation below the three-year average) to a forward book value estimate $2 per share lower than our current Q3 2017 estimate of $22.57, we still get to an equity valuation of $17.48, implying the market has overreacted to the Beechwood news. If we roll forward the current P/BV multiple of 0.73x that same lower estimate of Q3 2017 book, we would get to an equity valuation of about $15 per share. Likewise, if we apply the current 10x forward P/E multiple to our worst-case 2017E of $1.52, that would point to an equity value of around $15.20. Exhibit 1. CNO Price To Book (ex AOCI) Multiple Exhibit 2. CNO Price To Earnings Multiple

0.73x

Average, 0.91x

0.6x

0.7x

0.8x

0.9x

1.0x

1.1x

Se

p-13

Dec

-13

Mar

-14

Jun

-14

Se

p-14

Dec

-14

Mar

-15

Jun

-15

Se

p-15

Dec

-15

Mar

-16

Jun

-16

Se

p-16

Pric

e to

Boo

k (e

x AO

CI)

CNO

CNO Average

9.80x

Average, 12.42x

8.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

15.0x

16.0x

Se

p-13

Dec

-13

Ma

r-14

Jun

-14

Se

p-14

Dec

-14

Ma

r-15

Jun

-15

Se

p-15

Dec

-15

Ma

r-16

Jun

-16

Pric

e to

NTM

Ear

ning

s

CNO

CNO Average

Source: FactSet and company data Our valuation range of $18-20 brackets a 0.85x multiple against our current Q3 2017 book value per share (ex AOCI) estimate of $22.57. We recognize applying a multiple one-standard deviation lower than the three-year average may be warranted as a takeout premium has likely evaporated. Still, we can’t come to a scenario in which CNO will have to raise equity capital to address the implications of a Beechwood recapture, and we believe shares will melt up to our valuation range after the results of CNO’s audit are made public. Investment Opportunities We believe market has mis-priced impact of reinsurance recapture. CNO’s long path to recovery toward investment grade status appeared to have hit a bump in July when news reports surfaced of links between Beechwood Re Ltd. (Beechwood), and hedge fund Platinum Partners. Beechwood reinsured CNO’s closed block long-term care business in 2014, which was a key component in the company’s quest to free up capital. Platinum Partners is under investigation by Federal authorities. Last month, Fitch placed CNO ratings on Rating Watch Negative. Our base case points to a $0.64 charge in Q3 and lower excess capital. If Beechwood cannot

collateralize the reserve trust to 107% due to Platinum losses, CNO would recapture its long-term care policies. The company is in the process of auditing $126 million of Level 3 assets in the trust, which we assume will be impaired. The results of the audit should be made public by CNO soon after September 30. If we assume the audit results in an impairment of all $126 million of assets in question, plus a mark-to-market impact on liabilities to reflect the low interest rates, we think the Q3 after-tax charge would be around $100 million, or $0.64 per share. After factoring in the reversal of the $40 million capital relief CNO experienced at the time of the reinsurance agreement and the higher capital charge for the remaining $176 million lower rated Level 3 assets, we expect CNO’s excess capital would decline to about $275 million ($125 million deployable) from $375 million ($225 million deployable).


25

No equity raise is required even in our worst case. In our worst case we assume all $302 million of Level 3 assets in the trust will be impaired. Adding in the $50 million mark-to-market impact on liabilities, the net charge in Q3 would be around $229 million after-tax, or $1.29 per share. Also factoring in the reversal of the capital relief and higher capital charge on assets, we estimate the net draw down on holdco excess capital would be around$250 million, which would wipe out the company’s $225 million deployable (but not total) excess capital. As a result, we think CNO could suspend its share repurchase for several quarters and/or potentially raise capital through debt issuance. In the “Worst Case” scenario below, we suspend share repurchase for three quarters. Based on CNO’s recently giving up market capitalization of around $500 million, we think the market has already priced in the worst case scenario plus an equity raise (which we think is unlikely given the company’s debt capacity).

Exhibit 3. Base And Worst Case Scenarios For Recapture

After-tax charge per share

2016E EPS

2017E EPS

2018E EPS

2016 BVPS

2017 BVPS

2018 BVPS

Current Estimate NA $1.36 $1.62 $1.82 $21.57 $22.96 $24.45Base Case Recapture $0.64 $0.71 $1.62 $1.82 $20.88 $22.23 $23.67Worst Case Recapture $1.29 $0.06 $1.52 $1.70 $20.09 $21.25 $22.50

Note: BVPS ex. AOCI Source: Company data and Wells Fargo Securities, LLC estimates More about CNO’s long-term care reinsurance transaction. The announcement of CNO’s closed-block LTC reinsurance agreement in 2014 whereby CNO ceded over $500 million of statutory reserves to Cayman-domiciled Beechwood Re via 100% coinsurance was seen at the time as being significant for both CNO and potentially the long-term care industry. For CNO, the deal was important because the in-force reserves and liabilities associated with the LTC closed blocks were transferred and associated capital could be freed up. For the industry, the potential read-through was that private capital was emerging to take on older long-term care liabilities (something that hasn’t gained steam in the following 2+ years). We examine what we know of the transaction and parties involved below: Beechwood. Beechwood Bermuda is a reinsurance and wealth management company. The company’s

Beechwood Re, Ltd. is a reinsurer licensed by the Cayman Islands Monetary Authority and the entity which is CNO’s counterparty on the LTC transaction. According to the Wall Street Journal, Beechwood Re is part-owned by family member trusts of the principals of a hedge fund called Platinum Partners (Platinum). The paper also reported that Beechwood agreed to several deals in which the reinsurer bought part of Platinum’s investment portfolio. The deals were later restructured.

Platinum. Platinum Partners is a hedge fund firm that managed $1.25 billion at its peak and specialized in esoteric assets such as distressed debt and life settlement contracts. The firm is now in liquidation after one of the principals was arrested in relation to a union bribery investigation and the Wall Street Journal reported the firm is the subject of a separate fraud investigation.

Fitch. On August 3, Fitch placed CNO Financial Group on Ratings Watch Negative. The thrust of the ratings agency’s reasoning is that the coinsurance agreements between CNO operating subsidiaries and Beechwood require the LTC reserves to be over-collateralized to the tune of 7%. Given that CNO said it could not independently verify the asset values of Level 3 assets in the Beechwood trust associated with the LTC reserves, Fitch is concerned Beechwood would not be able to true up collateral in case of a shortfall, in which case CNO subsidiaries Washington National Insurance Company (WNIC) and Bankers Conseco Life Insurance Company (BCLIC) would be recaptured. We share Fitch’s concerns that recapture of almost $600 million of LTC reserves would have negative implications for the capital adequacy of WNIC and BCLIC.

What the parties have said so far:

o CNO: On the Q2 2016 conference call, CNO Erik Helding said “where we stand today as of 6/30,

Beechwood appears to be in compliance with the agreements.” CNO framed the potential downside in terms of $550 million of LTC reserves potentially coming back to the CNO operating companies if the Beechwood trust was not adequately collateralized. The consolidated risk-based capital ratio is 450%, which is higher than the businesses need. Of $376 million of holding company cash and investments. $225 is viewed as being excess capital. The implication being that even if all $550 million of reserves were recaptured, a combination of excess capital at the opco level plus holdco excess capital would be enough to prevent a capital event.


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o Beechwood. On August 15, Beechwood put out a release regarding loans to Platinum in which it said: “there has been no apparent negative impact to these loans that represent a small portion of our portfolio; and we continue to be confident in the strong security, strict covenants and over-collateralization we have in place to protect against future potential downside risk.” On the same day, Reuters reported that Beechwood had a $40 million collateralized loan to one of Platinum’s hedge funds, and 3%-5% of its $2.4 billion investment portfolio is linked to Platinum.

Recapitalization. The story at CNO for several years has been that it is nearing investment grade status, which would allow the company to recapitalize to assume a capital structure more typical of life insurance holding companies. Currently, CNO has a debt-to-total capital leverage ratio of 19.9% (versus rule-of-thumb 25% for ‘AA’ rating), a consolidated risk-based capital (RBC) ratio of 448% with no variable annuity or universal life with secondary guaranty exposure, and holdco cash and investments of $376 million. With more leverage, CNO should be able to expand operating ROE beyond the 9% range reported in Q2 2016. Distribution Network. CNO is able to sell new business in spite of its ratings largely through its own distribution. Bankers Life has a dedicated field force of more than 4,600 producing career agents. The career agents sell primarily supplemental health and long-term care insurance policies, life insurance, and annuities. These agents typically visit the prospective policyholder’s home to conduct personalized “kitchen-table” sales presentations. After the sale of an insurance policy, the agent serves as a contact person for policyholder questions, claims assistance, and additional insurance needs. Recently-launched distribution arms should help CNO utilize non-life NOLs. Since the former Conseco emerged from bankruptcy, the company has utilized net operating loss (NOL) carryforwards associated with life insurance businesses to pay no cash taxes, even though GAAP results show the statutory effective tax rate. Now that CNO has utilized the life NOLs, it is turning its attention to the $838 million of non-life loss carryforwards. The majority of these non-life NOLs expire in 2023. Using a 10% discount rate, CNO estimates the economic value to be $450 million. The catch is that CNO cannot use these NOLs to offset life insurance earnings. To better utilize the non-life NOLs, the company launched Bankers Life Securities, Inc. and Bankers Life Advisory Services, Inc. After toying with the idea of running a holding-company-level investment portfolio to make use of the NOLs, CNO hopes to generate distributions-sourced earnings instead. Investment Risks CNO to become a taxpayer in Q3 2016. Part of the bull thesis for CNO over the last decade was that the company was not a cash taxpayer due to life net operating loss (NOL) carryforwards. The life NOLs were substantially utilized in Q2 2016 and cash flows would be reduced by an estimated $17 million per quarter. CNO still has $838 million in non-life carryforwards, against which a $177 million valuation allowance sits. Long-term care claims experience. For both the Bankers Life long-term care business currently on CNO’s books and the closed-block LTC we assume CNO will have to recapture from Beechwood, adverse claims experience versus company assumptions will require higher levels of reserves. The Bankers Life book is relatively younger in age with fewer guarantees versus the LTC industry as a whole. CNO can address reserve deficiencies through retroactive premium rate increases on in force business. Continuation of a low interest rate environment for an extended period may negatively impact operating results and financial position. Although CNO is not among the group of most interest-rate sensitive names in our universe, the company does have exposure to narrowing spreads in its whole life, universal life, fixed rate and fixed indexed annuity contract. The weighted average fixed rate and fixed indexed annuity guaranteed rate was 2.03% at year-end 2015. The weighted average universal life guaranteed crediting rate was 3.06%.


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Company Overview CNO Financial Group was incorporated in 1979 by Stephen Hilbert as Security National of Indiana Corp., which bought Consolidated National Life Insurance Co. in 1983. The company attempted to diversify into consumer financial service in 1998, but eventually entered Chapter 11 reorganization in 2002. Conseco emerged from Chapter 11 nine months later in 2003 and thereafter focused solely on insurance. CNO is now a holding company for a group of insurance companies operating throughout the United States that develop, market, and administer health insurance, annuity, individual life insurance and other insurance products. CNO manages its business through the following operating segments: Bankers Life, Washington National and Colonial Penn, which are defined on the basis of product distribution; and corporate operations, comprised of holding company activities and certain noninsurance company businesses. Exhibit 4. Earnings Before Interest and Tax (Ex. Corporate) By Segment, 2015

Bankers Life , 75.9%

Washington National ,

22.9%

Colonial Penn , 1.2%

Source: Company data and Wells Fargo Securities, LLC Summary Business Unit Discussion Bankers Life. The Bankers Life segment markets and distributes Medicare supplement insurance, interest-sensitive life insurance, traditional life insurance, fixed annuities and long-term care insurance products to the middle-income senior market through a dedicated field force of career agents, financial and investment advisors, and sales managers supported by a network of community-based sales offices. The Bankers Life segment includes primarily the business of Bankers Life and Casualty Company. Bankers Life also has various distribution and marketing agreements with other insurance companies to use Bankers Life's career agents to distribute Medicare Advantage and prescription drug plans products in exchange for a fee. Exhibit 5. Bankers Life EBIT And Pre-Tax Operating Margin ($ in millions)

Exhibit 6. Washington National EBIT And Pre-Tax Operating Margin ($ in millions)

$291 $301 $311 $387 $370 171

12.1% 12.1% 12.3%

15.0%14.2%

13.20%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2011 2012 2013 2014 2015 H1 2016

$776 $899 $919 $903 $899 $450

12.4%

16.6% 15.3%

12.4% 12.4%

10.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC


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Washington National. The Washington National segment markets and distributes supplemental health (including specified disease, accident and hospital indemnity insurance products) and life insurance to middle-income consumers at home and at the worksite. These products are marketed through Performance Matters Associates of Texas, Inc. (a wholly owned subsidiary) and through independent marketing organizations and insurance agencies including worksite marketing. The products being marketed are underwritten by Washington National Insurance Company. This segment's business also includes certain closed blocks of annuities and Medicare supplement policies which are no longer being actively marketed by this segment and were primarily issued or acquired by Washington National. Exhibit 7. Colonial Penn EBIT And Pre-Tax Operating Margin ($ in millions)

-$5

-$9

-$13

$1

$6

$16

-1.9%

-3.3%

-4.6%

0.3%

1.8%

-2.3%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

-$15

-$10

-$5

$0

$5

$10

$15

$20

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Colonial Penn. The Colonial Penn segment markets primarily graded benefit and simplified issue life insurance directly to customers in the senior middle-income market through television advertising, direct mail, the internet and telemarketing. The Colonial Penn segment includes primarily the business of Colonial Penn Life Insurance Company.


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Investment Portfolio 40|86 Advisors, Inc., a registered investment advisor and wholly owned subsidiary of CNO, manages the investment portfolios of the company’s insurance subsidiaries. 40|86 Advisors had roughly $24.4 billion of assets (at fair value) under management at December 31, 2015, of which $24.1 billion were CNO’s assets and $.3 billion were assets managed for third parties. The company’s general account investment strategies are to: (1) provide largely stable investment income from a diversified high quality fixed income portfolio; (2) maximize and maintain a stable spread between CNO’s investment income and the yields the company pays on insurance products; (3) sustain adequate liquidity levels to meet operating cash requirements, including a margin for potential adverse development; (4) continually monitor and manage the relationship between CNO’s investment portfolio and the financial characteristics of the company’s insurance reserves such as durations and cash flows; and (6) maximize total return through active investment management. CNO’s invested assets are predominately fixed rate in nature and their value fluctuates with changes in market rates, among other factors (such as changes in the credit quality of the issuer). Exhibit 8. Investment Portfolio By Asset Class, 6/30/2016

90.08%

8.67%

1.28%1.25%

0.72%

Other Securities (Mostly FixedRate)

Cash and Cash Equivalents

Securities Owned: CommonCorporate Equity

Policy Loans

Securities Owned: PreferredCorporate Equity

Source: Company data and Wells Fargo Securities, LLC


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Capital Profile We summarize the financial strength ratios of CNO’s primary companies below. Exhibit 9. Financial Strength Ratings of Primary Companies

Moody's S&P Fitch AM Best

Bankers Conseco Life Insurance Co. -BBB+ (WN)Affirm8/1/2016

BBB+ (WN)Affirm8/3/2016

A-Upgrade8/26/2015

Bankers Life & Casualty Co. Baa1 (OS)Upgrade5/11/2015



A-Upgrade8/26/2015

Colonial Penn Life Insurance Co. Baa1 (OS)Upgrade5/11/2015



A-Upgrade8/26/2015

Washington National Insurance Co. Baa1 (OS)Upgrade5/11/2015



A-Upgrade8/26/2015

Source: Moody’s, S&P, Fitch, AM Best, and Wells Fargo Securities, LLC Management Below we provide a background of each key member of management, along with current stock ownership. Exhibit 10. Key Management

Name Position Approximate Age Background Ownership (% of O/S)

Edward John Bonach Chief Executive Officer 62 Former CNO CFO; also

National Life, Allianz 0.28

Erik Magnus Helding Executive VP & CFO 43 Joined in 2004; ran IR 0.00

Gary Chandru Bhojwani President 48 Joined in 2016; was management at Allianz 0.00


Summary Financial Model

Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: Share repurchases of $276 million, $200 million and $200 million for full year 2016E, 2017E, and 2018E

respectively. Consolidated operating EPS annual growth of 18.9% in 2017E and 12.5% in 2018E. Bankers Life EBIT growth of 5.1% in 2017E and 2.7% in 2018E Washington National EBIT growth of 16.8% in 2017E and 10.0% in 2018E Corporate operating losses of $75 million for full year 2017E and $71 million for 2018E Tax rate of 34.0% for both full year 2017E and 2018E.


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Exhibit 11. CNO Financial (CNO) Summary Earnings Model $ Millions Except Per Share Data

Fiscal Year Ends December 31 2013 2014 2015 Q1 2016 Q2 2016 Q3 2016E Q4 2016E 2016E 2017E 2018EEBIT BY SEGMENT

Bankers Life 311 387 370 78 93 86 90 346 364 374

Washington National 140 111 112 26 22 28 29 105 122 134

Colonial Penn (13) 1 6 (7) 3 2 4 2 4 2

Other CNO Business (28) - - 0 0 0 0 - - -

EBIT from Business Segments 411 499 487 97 118 115 122 453 490 510 Corporate, excluding interest expense 19 (28) (19) (8) (7) (8) (8) (31) (32) (32)

EBIT 430 471 468 89 111 107 114 421 458 478 Corporate Interest Expense 51 44 45 11 11 12 12 46 43 39

Income before realized gains, derivative & taxes 378 427 423 78 99 95 103 375 415 440 Tax Expense on Operating Income (130) (151) (148) (28) (36) (32) (35) (131) (141) (150)

Net operating earnings 248 277 275 50 64 63 68 244 274 290 Earnings of CLIC being sold 26 15 - - - - - - - -

Net realized investment gains 17 21 (31) (1) (4) (3) (3) (9) (10) (10)

Fair value changes in embedded derivative liabilities 23.0 (23.4) 7.7 (19.2) (16.5) - - (35.7) - -

Loss on extinguishment of debt, net of income taxes (137) (7) (2) (0) 0 0 0 (0) - -

Net income before valuation allow ance for deferred ta 177 268 249 29 43 61 65 199 264 280 Decrease in the valuation allow ance for deferred tax assets 302 55 33 20 7 - - 27 - -

Misc (0) (8) (11) (4) 10 0 0 6 - -

Net income 478 317 271 46 60 61 65 231 264 280 Operating EPS, fully converted $1.18 $1.28 $1.41 $0.27 $0.35 $0.35 $0.39 $1.36 $1.62 $1.82 % Change 72% 9% 10% -8% 14% 20% -26% -4% 19% 12%

SHARE COUNTS

Average Diluted Shares Outstanding 233 216 195 182 182 178 176 180 169 160

Average Diluted Shares Outstanding, Treasury Method 230 216 195 182 182 178 176 180 169 160

Diluted Shares Outstanding, EOP 227 206 186 181 178 177 175 175 164 155

Shares repurchased 9 22 21 5 3 4 3 15 11 10

Average stock price used for repurchase 13 17 18 18.25 18.70 17.68 17.95 18 19 21

Dollar amount of share repurchases 119 377 365 90 61 75 50 276 200 200

KEY RATIOSInvestment Yield (market) 5.07% 5.10% 4.85% 4.71% 4.65% 4.74% 4.76% 4.73% 4.69% 4.69%

Investment Yield (book) 5.23% 5.33% 4.98% 4.80% 4.77% 4.89% 4.91% 4.84% 4.83% 4.82%

Average Yield on Notes Payable 10.9% 10.3% -1.0% -1.3% -1.4% 10.8% 10.8% -0.9% -0.5% -0.5%

Pre-tax operating margin 9.7% 11.1% 11.0% 8.2% 10.3% 9.8% 10.6% 9.7% 10.5% 10.9%

Operating expenses to revenues 18.1% 19.3% 1.9% 1.8% 2.0% 1.6% 1.1% 1.6% 1.5% 1.5%

Benefit ratio (benefits to premium) 87.6% 83.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Medicare supplement loss ratio (consolidated) 66.8% 67.8% 69.2% 70.6% 73.1% 71.5% 71.6% 71.7% 71.6% 71.9%

Supplemental Health loss ratio 79.4% 80.0% 84.0% 81.2% 85.7% 80.9% 80.9% 82.2% 80.0% 78.5%

Operating expenses to revenues 18.1% 19.3% 1.9% 1.8% 2.0% 1.6% 1.1% 1.6% 1.5% 1.5%

BVPS & ROEBVPS, ex AOCI 19.17 19.00 20.30 20.58 20.87 21.21 21.57 21.57 22.96 24.45

BVPS, ex AOCI, ex NOL 14.79 14.98 16.36 16.61 17.08 17.52 18.02 18.02 20.07 22.37

ROE ex AOCI 6.9% 7.4% 7.3% 5.3% 6.9% 6.9% 7.4% 6.6% 7.5% 8.0%

ROE ex AOCI and NOL 8.8% 9.6% 9.2% 6.6% 8.5% 8.4% 8.9% 8.1% 8.8% 8.9%

BALANCE SHEETTotal Investments 27,152 24,908 24,487 24,936 25,997 26,038 26,162 26,162 26,837 27,540

% Total Assets 78.1% 79.9% 78.7% 79.3% 81.2% 81.2% 81.2% 81.2% 81.2% 81.2%

Total Assets 34,781 31,184 31,125 31,458 32,023 32,073 32,226 32,226 33,057 33,923 Total Liabilities 29,825 26,496 26,987 27,231 27,566 27,645 27,796 27,796 28,630 29,489 Shareholders equity, ex AOCI and preferred 4,223 3,863 3,736 3,686 3,678 3,650 3,652 3,652 3,650 3,656

Net NOL carrying value (965) (818) (724) (711) (668) (636) (601) (601) (460) (310)

Shareholders equity, ex AOCI, preferred and NOL 3,258 3,045 3,012 2,975 3,010 3,014 3,051 3,051 3,190 3,346

AOCI 732 825 403 541 778 778 778 778 778 778

Shareholders' equity, reported, ex preferred 4,955 4,688 4,139 4,227 4,456 4,428 4,429 4,429 4,427 4,434 Total liabilities and shareholders' equity 34,781 31,184 31,125 31,458 32,022 32,073 32,226 32,226 33,057 33,923

Source: Company data and Wells Fargo Securities, LLC estimates The external website links included in this publication are not maintained, controlled or operated by Wells Fargo Securities. Wells Fargo Securities does not provide the products and services on these websites and the views expressed on these websites do not necessarily represent those of Wells Fargo Securities. Please review the applicable privacy and security policies and terms and conditions for the website you are visiting.


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Company Description:

CNO Financial Group is a holding company headquartered in Carmel, Indiana. Formerly known as Conseco, Inc., operating subsidiaries include Bankers Life, Colonial Penn and Washington National. Through its subsidiaries, CNO engages in the development, marketing, and administration of supplemental health insurance, annuity, individual life insurance, and other insurance products for senior and middle-income markets in the United States.

WELLS FARGO SECURITIES, LLC Principal Financial Group, Inc. EQUITY RESEARCH DEPARTMENT

33

Principal Financial Group, Inc. PFG: Resuming Coverage With An Outperform Rating; Ring The Bell Summary: We are resuming coverage on Principal Financial with a change in

analyst, an Outperform rating on the shares and a valuation range of $56-60 per share. Our EPS estimates are $4.40 for 2016 and $4.80 for 2017. We like the niches Principal has carved out in its business lines, which allow the company to continue growing its operating earnings and expanding its ROE even if rates stay lower for longer. We expect PFG’s price multiple will continue to expand as the company shifts its earnings mix toward less capital-intensive, fee-based earnings.

The pushback: why would I want to buy a life insurer/asset management/retirement company? The initial reaction to some investors might be summed up as: “life insurers are tied to low interest rates, active asset managers are going to the way of the dodo bird, and the 401(k) industry is in net outflows as baby boomers retire and millennials are not saving…why should I own Principal?” While there are elements of truth to all three statements, we think PFG is a unique animal whose positioning has set itself up well relative to larger peers who are standalone insurers or active asset managers.

PFG is less tied to interest rates. PFG operates two lines of insurance: group benefits and individual life. Together, these businesses contribute only about 20% of PFG earnings.

PGI was never a large third-party active manager of active core equity strategies. While it is true established active managers have struggled with the secular shift to passive from active management, PFG’s “pure” asset management business Principal Global Investors (PGI, about 20% of total earnings) has a differentiated boutique strategy, with most of the core equity strategy money coming from Principal’s retirement business. PGI experienced net inflows of $4 billion in 2Q 2016. We are forecasting positive net flows through 2018.

Int’l Retirement headwinds turning into tailwinds. We think future retirement growth will come from PFG’s international pension business -- Principal International (PI). In 2015 and early 2016, the Brazilian recession and a strengthening US dollar have acted as headwinds to US GAAP results in the segment. With tailwinds including the Brazilian BOVESPA index 34% higher year-to-date, we think PI earnings could grow at a double-digit CAGR going forward.

Q3 preview. We are forecasting EPS of $1.12 versus consensus of $1.10. Our Q3 EPS estimate reflects stronger-than-expected equity market performance, lower interest rates, and stronger emerging market currencies in general in the quarter.

Valuation Range: $56.00 to $60.00 from NE to NE Our range is based on a SOTP analysis, which ascribes specific values to PFG's 2017E fee-based earnings ($48), spread-based earnings ($7), risk-based earnings ($8), and corporate losses (-$6). Risks to our valuation range include spread compression, credit losses, weak equity markets, and volatile FX. Investment Thesis: We rate PFG shares Outperform. We like the niches Principal has carved out in its businesses, which do not leave the company dependent on risky insurance products like variable annuities. As the percentage of earnings from fee-based earnings increases from 70% to 75%, PFG's multiple should continue to expand.

Outperform


Market Weight

Resumption of Coverage

2015A 2016E 2017E EPS Curr. Prior Curr. Prior Q1 (Mar.) $1.09 $0.97 A NC $1.16 NE Q2 (June) 1.09 1.15 A NE 1.17 NE Q3 (Sep.) 1.06 1.12 NE 1.20 NE Q4 (Dec.) 1.02 1.16 NE 1.27 NE FY $4.26 $4.40 NE $4.80 NE CY $4.26 $4.40 $4.80 FY P/EPS 11.7x 11.3x 10.4x Rev.(MM) $12,121 $12,350 $13,413 Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful V = Volatile, = Company is on the Priority Stock List

Operating EPS

Ticker PFG

Price (09/22/2016) $49.87 52-Week Range: $33-53 Shares Outstanding: (MM) 287.6 Market Cap.: (MM) $14,367.1 S&P 500: 2,179.49 Avg. Daily Vol.: 1,244,810 Dividend/Yield: $1.64/3.3% LT Debt: (MM) $3,270.2 LT Debt/Total Cap.: 25.7% ROE: 13.0% 3-5 Yr. Est. Growth Rate: 10.0% CY 2016 Est. P/E-to-Growth: 1.1x Last Reporting Date: 08/28/2016






34

Investment Thesis Unlike pure life insurers, Principal has a path to operating earnings growth and ROE expansion even if long-term interest rates stay at current low levels for an extended period of time. With a little help from global equity markets, PFG can accelerate revenue growth and expand margins in its asset management and retirement businesses without putting capital at risk. We like the niches Principal has carved out in its businesses, which do not leave the company dependent on risky insurance products like variable annuities. As the percentage of earnings from fee-based earnings increases from 70% to 75%, PFG’s multiple should continue to expand. Valuation We prefer to use a sum-of-the parts valuation for Principal due to its disparate lines of business. For comparison purposes, we break out the business segments by source of earnings: 1) Fee (asset management and non-spread retirement businesses), 2) Spread and 3) Risk. For the fee businesses, we comp PFG against a basket of asset managers including Blackrock (16.6x FactSet consensus 2017E), Franklin Resources (13.2x 2017E), and T Rowe Price (13.8x 2017E). For the spread and risk businesses, we look to life insurers without both: 1) variable annuities with living benefits and 2) long-term care as comps. Exhibit 1. Sum-Of-The-Parts Valuation ($ in millions, unless per share)

2017 E

Pre tax Earnings ($ millions)

P/E Multiple

Implied Valuation ($ millions)

Per Share

RIS - Fee 526.1 Principal Global Investors 471.5 Principal International 311.2Total Fee 1,308.8 Assumed taxes @18% 237.0Fee after tax earnings 1,071.8 13.0x 13,933 $48RIS - Spread 306.4 Assumed taxes@33% 101.1Spread after tax earnings 205.3 10.0x 2,053 $7 Individual Life Insurance 165.1 Specialty Benefits Insurance 206.4Total risk 371.5 Assumed taxes@33% 122.6Risk after tax earnings 248.9 9.5x 2,365 $8Corporate and Other (235.5) Assumed taxes@40% (94.2)Corporate after tax earnings (141.3) 12.0x (1,696) ($6)Total after tax Income 1,384.7 12.0x 16,655

Diluted Shares Outstanding (millions) 288

Valuation Range $56-$60 Source: Company data and Wells Fargo Securities, LLC estimates


35

Exhibit 2. PFG Price-To-Book (ex AOCI) Multiples Exhibit 3. PFG Price-To-Earnings Multiples

1.51x Average, 1.57x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

1.8x

2.0xS

ep

-13

Dec

-13

Mar

-14

Jun

-14

Se

p-1

4

Dec

-14

Mar

-15

Jun

-15

Se

p-1

5

Dec

-15

Mar

-16

Jun

-16

Se

p-1

6

Pric

e to

Boo

k (e

x AO

CI)

PFG

PFG Average


7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

Se

p-1

3

Dec

-13

Mar

-14

Jun

-14

Se

p-1

4

Dec

-14

Mar

-15

Jun

-15

Se

p-1

5

Dec

-15

Mar

-16

Jun

-16

Pric

e to

NTM

Ear

ning

s

PFG

PFG Average

Source: FactSet, company reports, and Wells Fargo Securities, LLC Investment Opportunities Tailwinds in Principal International. We think future retirement growth will come from PFG’s international pension business -- Principal International (PI). In 2015 and early 2016, the Brazilian recession and a strengthening US dollar have acted as headwinds to US GAAP results in the segment. On a currency-neutral basis, PI earnings have seen mid-teens growth. Principal has pointed to potentially expanding in Mexico where the company is #6 in the mandatory pension market. With tailwinds including the Brazilian BOVESPA index 35% higher year-to-date and f/x comps getting easier, we think PI earnings could grow at a double-digit CAGR going forward. Exhibit 4. Brazilian BOVESPA is up 35% YTD Exhibit 5. Chilean Peso F/X Comps Getting Easier YoY

35,000

40,000

45,000

50,000

55,000

60,000

65,000

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15Fe

b-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-15

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16Fe

b-16

Mar

-16

Apr

-16

May

-16

Jun-

16Ju

l-16

Aug

-16

Sep

-16

Series1

550

570

590

610

630

650

670

690

710

730

750

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15Fe

b-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-15

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

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Jan-

16Fe

b-16

Mar

-16

Apr

-16

May

-16

Jun-

16Ju

l-16

Aug

-16

Sep

-16

Chilean Peso Per USD

Source for both Exhibits: FactSet and Wells Fargo Securities, LLC Principal Global Investors’ flows are trending better than the industry as a whole. While active asset managers might be going to the way of the dodo bird, PGI was never a large third-party active manager of active core equity strategies. While it is true established active managers have struggled with the secular shift to passive from active management, PFG’s “pure” asset management business Principal Global Investors (PGI, about 20% of total earnings) has a differentiated boutique strategy, with most of the core equity strategy money coming from Principal’s retirement business. PGI experienced net inflows of $4 billion in 2Q 2016. We are forecasting positive net flows through 2018, in part driven by the company’s strong investment performance. As of the end of Q2 2016, 95% and 93% of Principal mutual funds, separate accounts and Collective Investment Trust (CITs) were in the top two quartiles of Morningstar rankings. See Exhibit 6. In addition to organic growth, the company has also pointed to potential M&A targets for PGI including infrastructure and global real estate.


36

Exhibit 6. Industry Flows Have Been Unfavorable, But PGI Has Held Up Well ($ in millions)

$(150,000)

$(100,000)

$(50,000)

$-

$50,000

$100,000

3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

ICI Long-Term Mutual Fund Net New Cash Flow

$(1,000)

$‐

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

Principal Global Investors Unaffiliated Net Flows

Source: Investment Company Institute (http://www.ici.org), company data and Wells Fargo Securities, LLC Exhibit 7. Morningstar Rankings Of Principal Mutual Funds, Separate Accounts And CITs

87% 87%91%

73%

91% 94%

72%

95% 93%

1-Year 3-Year 5-Year

Percentage of funds in the top two quartiles

6/30/2015 3/31/2016 6/30/2016

Source: Company data and Wells Fargo Securities, LLC Some life insurers are tied to low interest rates, but not PFG. Principal operates two lines of insurance: group benefits and individual life. Together, these insurance businesses contribute about 20% of PFG earnings. Although there is an element of interest rate pressure on the income statement, PFG has no exposure to risky long-tail liabilities like variable annuities with living benefits or long-term care that put the company’s capital at risk.


37

Investment Risks Increased competition in 401(k) market. In addition to net outflows in the 401(k) industry (as baby boomers retire and millennials are not saving), competition in the marketplace has also been intense. Principal has guided +2-4% net revenue growth for 2016 in Retirement and Income Solutions (RIS)-Fee, but the company is still negative year-to-date. We agree that fee compression is an issue in the domestic market, as it has been for years. But unlike the industry as a whole, PFG is experiencing net inflows.

Exhibit 8. Unlike Industry, PFG Still Has Positive Flows $ in billions

Exhibit 9. PFG Fee Margins are Compressing

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$(60)

$(40)

$(20)

$-

$20

$40

$60

$80

$100

$120

PrincipalRIS Fee(RHS)

US DCPlans(LHS)

37.0%

32.5%31.7%

31.0%30.4%

30%

31%

32%

33%

34%

35%

36%

37%

38%

39%

40%

2014 2015 2016E 2017E 2018E

RIS Fee Pretax Return on Net Revenue

Source: Investment Company Institute, (http://www.ici.org), company data Wells Fargo Securities, LLC The Chilean regulatory environment. From time to time, proposals are made to cut fees in Chile’s system of mandatory defined contribution pensions, known as Administradoras de Fondos de Pensiones (AFP). To boost payments for retirees, Chile's President Michelle Bachelet proposed in August a series of reforms to the private pension system. According to her proposals, workers would be given more say on investment decisions made by the AFPs, which would be forced to pay back contributors after periods of losses. Ms. Bachelet also proposed eliminating hidden fees charged by the AFPs, using a single mortality table for both men and women, as well as strengthening a program that provides a minimum pension for Chileans who have not worked or contributed to an AFP. To give workers an alternative to the private system started in the 1980s, Ms. Bachelet also reiterated that she would continue to push for the creation of a public pension fund. Equity Risk. PFG is exposed to the risk that asset-based fees decline as a results in declined in assets under management. The company estimates an immediate 10% decline in the S&P 500 index followed by a 2% per quarter increase would reduce annual pre-tax operating earnings by 4% to 6%. Company Overview Principal Financial Group was founded in 1879 by Edward Temple, a banker from Chariton, Iowa, and five other colleagues. Formerly known as Bankers Life Association, the company provided life insurance to healthy men between the ages of 22 and 55, who were not employed in any high-risk occupations. The company was eventually renamed to Principal Financial Group in 1985, and now offers businesses, individuals and institutional clients a wide range of financial products and services, including retirement, asset management and insurance through its diverse family of financial services companies. Principal organizes its businesses into four reportable segments: Retirement and Income Solutions, Principal Global Investors, Principal International, and U.S. Insurance Solutions. The company also has a Corporate segment, which consists of the assets and activities that have not been allocated to any other segment.


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Exhibit 10. Operating Earnings (Ex. Corporate) By Segment, 2015

Retirement & Income

Solutions, 40.5%

Principal Global Investors,

21.2%

Principal International,

14.8%

US Insurance Solutions,

23.5%

Source: Company data and Wells Fargo Securities, LLC Summary Business Unit Discussion Retirement and Income Solutions. With the RIS segment, the fee-based businesses include a wide variety of investment and administrative products and services for defined contribution plans, including 401(k) and 403(b) plans; defined benefit pension plans; nonqualified executive benefit plans and ESOPs. In addition, the company also generates fee income from offering variable annuities to individuals and plans, through which the customer makes one or more deposits of varying amounts and intervals. The spread-based businesses include individual fixed annuities that may be categorized in two ways: (1) deferred, in which case assets accumulate until the contract is surrendered, the customer dies or the customer begins receiving benefits under an annuity payout option; or (2) payout, in which case payments are made for a fixed period of time or for life. Exhibit 11. RIS – Fee pre-tax operating earnings and return on net revenue ($ in millions)

Exhibit 12. RIS – Spread pre-tax operating earnings and return on net revenue ($ in millions)

$141 $153 $146 $139 $142 $143 $84 $125 $114 $125

37.1%39.2%

36.8% 34.9% 36.3% 35.7%

21.4%

32.0% 31.3% 32.6%

0.0%

5.0%10.0%

15.0%20.0%

25.0%30.0%35.0%

40.0%45.0%

$0

$20$40

$60$80

$100$120$140

$160$180

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q3

2015Q4

2016Q1

2016Q2

$77 $74 $62 $60 $61 $74 $50 $62 $67 $70

58.2%

61.2%

58.9%

53.5%57.3%

58.7%

51.3%

57.3%58.8%

57.7%

46.0%

48.0%

50.0%

52.0%

54.0%

56.0%

58.0%

60.0%

62.0%

$0$10$20$30$40$50$60$70$80$90

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q3

2015Q4

2016Q1

2016Q2

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Principal Global Investors. The Principal Global Investors (PGI) segment manages assets for sophisticated investors around the world, using a multi-boutique strategy that provides diverse investment capabilities including equity, fixed income, real estate and other alternative investments. The company also has experience in asset allocation, stable value management and other structured investment strategies. Principal focuses on providing services to our other segments in addition to our retail mutual fund and third party institutional clients. The company maintains offices in Australia, Beijing, Brazil, Dubai, Germany, Hong Kong, Japan, the Netherlands, Singapore, the United Kingdom and the United States.


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Exhibit 13. PGI Pre-tax Operating Earnings And Return On Adjusted Revenue ($ in millions)

Exhibit 14. PI Pre-tax Operating Earnings And Combined Return On Net Revenue ($ in millions)

$81 $84 $86 $100 $93 $99 $95 $102 $80 $118

33.3% 33.6% 33.6% 33.3% 33.0% 34.2% 34.0% 34.1%30.0%

38.2%

0.0%5.0%

10.0%15.0%

20.0%25.0%

30.0%35.0%

40.0%45.0%

$0

$20

$40

$60

$80

$100

$120

$140

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q3

2015Q4

2016Q1

2016Q2

$82 $91 $102 $78 $81 $72 $51 $67 $68 $70

43.1% 44.4%46.7%

37.7%42.3%

37.3%

27.2%

34.5%36.8% 36.1%

0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%

$0

$20

$40

$60

$80

$100

$120

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q3

2015Q4

2016Q1

2016Q2

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Principal International. The Principal International (PI) segment has operations in Brazil, Chile, China, Hong Kong Special Administrative Region, India, Mexico and Southeast Asia. The company focuses on countries and territories with growing middle classes, favorable demographics, and increasing long-term savings, ideally with defined contribution retirement markets. Principal entered these locations through acquisitions, start-up operations and joint ventures. U.S. Insurance Solutions. The U.S. Insurance Solutions segment offers group and individual insurance solutions. Principal focuses on providing comprehensive insurance solutions for small and medium-sized businesses and their owners and executives. The company organizes its operations into two divisions: Specialty Benefits Insurance and Individual Life Insurance. Specialty benefits insurance, which includes group dental, vision, life and disability insurance and individual disability insurance, is an important component of the company’s employee benefit offering at small and medium-sized businesses. Principal offers traditional employer sponsored and voluntary products for group dental, vision, life and disability. The company also offers group dental, vision and disability on a fee-for-service basis. The individual disability insurance is also sold on an individual or multi-life basis. Principal began as an individual life insurer in 1879 when the company began selling traditional life insurance products to individuals. PFG’s individual life operations now specializes in providing solutions for small to medium-sized companies to protect against risk and loss, assist with succession planning and wealth transfer and to build and protect wealth for retirement. The company also provides solutions to meet the personal needs of business owners, executives and affluent individuals. Exhibit 15. Specialty Benefits Pre-tax Operating Earnings And Return On Premium and Fees ($ in millions)

Exhibit 16. Individual Life Pre-tax Operating Earnings And Return On Premium and Fees ($ in millions)

$41 $46 $49 $44 $47 $51 $65 $57 $39 $67

10.6%11.5% 12.0% 10.9% 10.7% 12.0%

15.2%

12.9%

8.6%

14.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

$0

$10

$20

$30

$40

$50

$60

$70

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

$22 $28 $77 $39 $35 $37 $108 $30 $42 $37

9.3%11.9%

32.5%

16.6% 14.2% 15.3%

44.9%

12.5%16.4% 14.8%

0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%

$0

$20

$40

$60

$80

$100

$120

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016



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Investment Portfolio The company’s U.S. invested assets are managed primarily by the Principal Global Investors segment. Principal’s primary investment objective is to maximize after-tax returns consistent with acceptable risk parameters. The company seeks to protect policyholders' benefits by optimizing the risk/return relationship on an ongoing basis, through asset/liability matching, reducing the credit risk, avoiding high levels of investments that may be redeemed by the issuer, maintaining sufficiently liquid investments, and avoiding undue asset concentrations through diversification. The major categories of U.S. invested assets are fixed maturities and commercial mortgage loans. The remainder is invested in other investments, real estate, residential mortgage loans and equity securities. In addition, policy loans are included in the company’s invested assets. Principal is exposed to two primary sources of investment risk: (1) credit risk, relating to the uncertainty associated with the continued ability of an obligor to make timely payments of principal and interest; and (2) interest rate risk, relating to the market price and/or cash flow variability associated with changes in market yield curves. The company purchases credit default swaps to hedge certain credit exposures in its investment portfolio and total return swaps and futures to hedge a portion of PFG’s investment portfolio from credit losses. Exhibit 17. Investment Portfolio By Asset Class, 6/30/2016

44.08%

16.33%

16.07%

7.00%

5.47%

2.86%2.16%

1.87%1.82% 1.28% 1.05%

Securities Owned: CorporateDebt

Securities Owned: Asset-BackedSecurities

Mortgage Loans

Securities Owned: State &Municipal

Other Investments


Securities Owned: U.S.Government & Agency

Total Investment in Real Estate

Total Equity Instruments

Source: Company data and Wells Fargo Securities, LLC Capital Profile We summarize the financial strength ratios of Principal’s primary companies below. Exhibit 18. Financial Strength Ratings of Primary Companies

Moody's S&P AM Best Fitch

Principal Life Insurance CompanyA1, Good;Outlook: Stable

A+, Strong; Outlook: Stable

A+, Superior; Outlook: Stable

AA-, Very Strong; Outlook: Stable

Principal National Life Insurance CompanyA1, Good; Outlook: Stable

A+, Strong; Outlook: Stable

A+, Superior; Outlook: Stable

AA-, Very Strong; Outlook: Stable

Source: Moody’s, S&P, Fitch, AM Best, and Wells Fargo Securities, LLC


41

Management Below we provide a background of each key member of management, along with current stock ownership. Exhibit 19. Key Management

Name Position Approximate

Age Background Ownership (% of O/S)

Daniel Joseph Houston Chairman, President & CEO 55 Joined Principal in 1984 0.05

Nora M. EverettPresident of RIS and Chairman of Principal Funds

57 Joined Principal in 1991 0.08

James P. McCaughan Executive VP & COO, International 63 Joined Principal in 2002 0.00

Deanna D. Strable President – U.S. Insurance Solutions Joined Principal in 1990 0.00

Luis Valdés President, Principal International 59 Joined Principal in 1998 0.00

Terrance Joseph "Terry" Lillis Executive VP & CFO 64 Joined Principal in 1982 0.03

Deanna D. Strable-Soethout Executive VP & CFO (effective Feb 2017) 47 Joined Principal in 1990 0.03

Source: Company data and Wells Fargo Securities, LLC Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: Share repurchases of $390 million, $200 million and $200 million for full year 2016E, 2017E, and 2018E. Consolidated operating EPS annual growth of 8.0% in 2017E and 10.5% in 2018E. RIS - Fee pretax operating earnings growth of 5.0% in 2017E and 3.0% in 2018E RIS - Spread pretax operating earnings growth of 9.5% in 2017E and 6.1% in 2018E PGI pretax operating earnings growth of 11.2% in 2017E and 12.6% in 2018E Principal International pretax operating earnings growth of 5.0% in 2017E and 20.4% in 2018E Specialty Benefits Insurance operating earnings growth of -1.5% in 2017E and 10.1% in 2018E Individual Life Insurance pretax operating earnings growth of 7.1% in 2017E and -2.7% in 2018E Corporate and Other operating losses of $235 million for 2017E and $237 million 2018E Annualized equity market return of 8% Tax rate of 21% for both full year 2017E and 2018E.


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Exhibit 20. Principal Financial Group (PFG) Summary Earnings Model $ Millions Except Per Share Data

Fiscal Year Ends December 31 2013 2014 2015 Q1 2016 Q2 2016 Q3 2016E Q4 2016E 2016E 2017E 2018E

OVERVIEW

Pretax Operating Income (inc. noncontrolling interest) RIS - Fee 451.0 578.5 493.5 114.0 124.5 122.0 129.3 489.7 526.1 548.7

RIS - Spread 301.5 272.7 246.6 67.4 70.2 69.9 72.2 279.8 306.4 325.1

Retirement & Income Solutions 752.5 851.2 740.1 181.4 194.7 191.9 201.5 769.5 832.6 873.8Principal Global Investors 289.6 350.1 388.5 79.7 117.5 111.2 115.5 423.9 471.5 530.9Principal International 294.4 352.7 271.3 68.0 69.9 75.3 77.6 290.8 311.2 367.5 Individual Life Insurance 128.8 164.9 209.1 41.9 37.1 41.4 33.7 154.1 165.1 160.7

Specialty Benefits Insurance 161.8 179.2 220.4 38.6 66.5 48.6 55.8 209.5 206.4 227.2

US Insurance Solutions 290.6 344.1 429.5 80.5 103.6 90.0 89.5 363.6 371.5 387.8Corporate and Other (193.1) (175.0) (192.3) (53.3) (54.5) (56.3) (57.0) (221.1) (235.5) (237.1)

Total Segment Income 1,434.0 1,723.1 1,637.1 356.3 431.2 412.1 427.1 1,626.7 1,751.2 1,922.9Taxes 341.1 372.2 341.9 70.0 94.1 86.5 89.7 340.3 367.8 403.8

Tax Rate 23.8% 21.6% 20.9% 19.6% 21.8% 21.0% 21.0% 20.9% 21.0% 21.0%

Preferred stock dividends 24.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Operating Income available to common s/h 1,059.9 1,317.9 1,270.5 286.3 337.1 325.5 337.4 1,286.3 1,383.5 1,519.1

Operating EPS $3.56 $4.41 $4.26 $0.97 $1.15 $1.12 $1.16 $4.40 $4.80 $5.30 % Growth 32.1% 24.1% -3.4% -11.0% 6.1% 5.1% 13.5% 3.2% 9.1% 10.5%

Wtd. Dil. Avg. Shares Outstanding (Mil.) 298.1 298.6 297.9 294.3 292.6 291.5 290.5 292.2 288.1 286.4

Shares Repurchased 3.89 4.27 5.48 2.33 2.47 2.17 2.08 9.06 3.83 3.40

Dollar Repurchased 137.1 205.1 275.4 85.9 104.0 100.0 100.0 389.9 200.0 200.0

Avg. share price of repurchase 35.21 48.06 50.26 36.94 42.06 46.00 48.00 43.06 52.24 58.79

Actual Shares End of Period 295.2 293.9 291.4 290.4 288.0 288.2 285.9 285.9 284.0 282.4

Net Realized Gains (Losses) (179.1) (100.5) (133.8) 81.7 (14.8) (22.0) (22.0) 22.9 (88.0) (88.0)

Non-Recurring Items (1.1) (105.9) 72.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Discontinued Ops (after-tax) 0.0 (0.4) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Income 879.7 1111.1 1209.3 368.0 322.3 303.5 315.4 1309.2 1295.5 1431.1

Dividend Per Share 0.98 1.28 1.52 0.38 0.39 0.39 0.39 1.55 1.71 1.94

Ann. Payout Ratio 28% 29% 36% 0.0% 0.0% 0.0% 0.0% 35% 36% 37%

Common BVPS (Excl. AOC, ex f/x translation) $29.12 $30.30 $31.04 $32.25 $32.98 $33.27 $33.90 $33.90 $36.24 $38.85Common Book Value (Reported) $30.95 $32.81 $31.95 $34.58 $36.46 $36.74 $37.39 $37.39 $39.77 $42.39

Ann. Adj. Oper. ROE (Excl. AOCI) ex f/x 12.2% 14.2% 12.8% 11.1% 12.9% 12.3% 12.7% 12.3% 12.6% 13.0%

Total Debt/Capital 23.1% 21.3% 27.7% 26.6% 25.8% 25.6% 25.4% 25.4% 24.3% 23.1%

Adjusted Debt/Capital 24.3% 22.4% 27.7% 26.6% 25.8% 25.6% 25.4% 25.4% 24.3% 23.1%

BALANCE SHEET

Balance Sheet DataTotal Investments 66,757 68,434 69,821 73,808 76,687 76,687 76,687 76,687 76,687 76,687

Total Assets 208,191 219,087 218,686 217,570 223,074 225,285 227,798 227,798 242,633 259,258

Gen Acct/Total Assets 38% 36% 37% 39% 40% 40% 40% 40% 40% 40%

Sep. Acct./Total Assets 62% 64% 63% 60.8% 60.4% 60.4% 60.4% 60% 60% 60%

Total Liabilities 198,414 208,855 209,309 207,460 212,507 214,627 217,038 217,038 231,270 247,219

Total Equity 9,777 10,232 9,377 10,110 10,568 10,658 10,760 10,760 11,363 12,038 Source: Company data and Wells Fargo Securities, LLC estimates Company Description:

Principal Financial Group, headquartered in Des Moines, Iowa, is a leading provider of retirement savings and investment and insurance products and services, with a focus on providing retirement products and services to businesses and their employees, specifically 401(k) plans. The company is among the nation's largest providers of 401(k) plans and the clear leader in the small business market. Principal also offers individual life and disability insurance, group life, and health insurance.

WELLS FARGO SECURITIES, LLC MetLife, Inc. EQUITY RESEARCH DEPARTMENT

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MetLife, Inc. MET: Resuming Coverage With An Outperform Rating Look On The Bright(house) Side Summary: We are resuming coverage of MetLife with an Outperform rating, a

change in analyst, and a valuation range of $51-53. Our EPS estimates are $4.56 for 2016 and $5.75 for 2017. We think MetLife is taking the correct path of action to unlock value by shrinking the company. After separating its retail businesses, the go-forward MET should be less impacted by equity market movement and interest rates, which should command a higher multiple. Additionally, the business mix of the go-forward MET should require less capital and should allow the company to free up capital for share repurchase, driving ROE expansion.

Spin To Win. Soon after a September 27 board meeting, MET is to file a Form S-1 or Form 10 with the SEC and begin the process of engaging in an IPO or spin off of the U.S. retail business, which is to operate under the name Brighthouse Financial. We believe whatever form the separation takes will have at least two steps—some combination of public offering, spin, and/or exchange offer.

Freeing up capital for deployment. In the spin scenario, Brighthouse should have around $240 billion of total assets after the spin. Assuming a 5% capital ratio on a GAAP basis, we think the SpinCo could issue roughly $3 billion of long-term debt to maintain a 25% leverage ratio. Since there is no debt allocation to the SpinCo, we expect the go-forward MET’s debt-to-total capital ratio could increase to over 26% from 23.5% at the end of Q2 given a smaller equity base. For a short period at the least, we believe the ratings agencies will give the RemainCo a grace period to bring its debt-to-capital ratio back to 25% or lower. Given the expected reduction in capital and compliance burden associated with the spin, we think the RemainCo could resume share repurchase later in 2016.

A lower RBC target post spin given less sensitivity to macro. Post spin, the remaining businesses in the go-forward MET would be more focused on mortality and morbidity underwriting. While the target risk-based capital (RBC) ratio going forward might not be as low as Torchmark’s 325%, we think over time it should gravitate toward 400% or lower given its lower sensitivity to macroeconomic factors including interest rates and equity market performance.

Potential reversal of favorable SIFI ruling on appeal. A risk to holding the stock through Q4 2016 is an adverse appeals court decision regarding MET’s systemically important financial institution (SIFI) tag. Oral arguments on the Government’s appeal will take place on October 24.

Q3 preview. We are forecasting EPS of $1.15 versus consensus of $1.27. Our Q3 EPS estimate reflects the re-segmentation charge of $300 million after-tax, as well as the impact related to a stronger-than-expected equity market performance and lower interest rates in the quarter.

Valuation Range: $51.00 to $53.00 from NE to NE Our range is based on a SOTP analysis, which ascribes P/E multiples of 9.5x to Go-Forward MET's 2017E EPS of $4.60, and 7x to Brighthouse's 2017E EPS of $1.15. Risks to our valuation range include investment spread compression, falling investment income, weak equity markets, a strong USD, and credit losses. Investment Thesis: We rate MET shares Outperform. After separating its retail businesses, we expect the go-forward MET will command a higher multiple given less sensitivity to equity and interest rates, and the potential for ROE expansion.

Outperform


Market Weight



Operating EPS FY EPS impacted by share repurchase

Ticker MET

Price (09/22/2016) $44.60 52-Week Range: $35-53 Shares Outstanding: (MM) 1,098.9 Market Cap.: (MM) $49,010.9 S&P 500: 2,179.49 Avg. Daily Vol.: 6,594,840 Dividend/Yield: $1.60/3.6% LT Debt: (MM) $16,586.0 LT Debt/Total Cap.: 25.6% ROE: 9.0% 3-5 Yr. Est. Growth Rate: 9.0% CY 2016 Est. P/E-to-Growth: 1.1x Last Reporting Date: 08/03/2016






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Investment Thesis MetLife is making the institutionally difficult decision to shrink itself to unlock value. We think it is the correct path of action. By separating the retail businesses into a new unit called Brighthouse Financial, which is to come to the public markets via IPO or spinout, MetLife should realize several benefits. The income statement of the go-forward MET would be less impacted by equity market movement and interest rates, which should command a higher multiple. Additionally, the business mix of the go-forward MET should require less capital and should allow the company to free up capital for share repurchase, driving ROE expansion. Valuation Our range is based on a SOTP analysis, which ascribes P/E multiples of 9x to Go-Forward MET's 2017E EPS of $4.60, and 6x to Brighthouse's 2017E EPS of $1.15. Risks to our valuation range include investment spread compression, falling investment income, weak equity markets, a strong USD, and credit losses. Exhibit 1. Sum-Of-The-Parts Valuation

EPS Estimate Applied PER Implied ValuationCurrent 2017E $5.75

Implied Go-Forward MET $4.60 9.5x $43.71Implied Brighthouse $1.15 7.0x $8.05

$51 - $53Valuation Range Source: Company data and Wells Fargo Securities, LLC estimates Exhibit 2. MET Price-To-Book (ex AOCI) Multiples Exhibit 3. MET Price-To-Earnings Multiples

0.84x

Average, 1.06x

0.5x

0.6x

0.7x

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

Se

p-13

Dec

-13

Ma

r-1

4

Jun

-14

Se

p-14

Dec

-14

Ma

r-1

5

Jun

-15

Se

p-15

Dec

-15

Ma

r-1

6

Jun

-16

Se

p-16

Pric

e to

Boo

k (e

x AO

CI)

othe

r tha

n FC

TA

MET

MET Average


5.5x

6.0x

6.5x

7.0x

7.5x

8.0x

8.5x

9.0x

9.5x

10.0x

Se

p-13

Dec

-13

Mar

-14

Jun

-14

Se

p-14

Dec

-14

Mar

-15

Jun

-15

Se

p-15

Dec

-15

Mar

-16

Jun

-16

Pric

e to

NTM

Ear

ning

s

MET

MET Average

Source: FactSet and company data


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Investment Opportunities Separation of U.S. retail business, Brighthouse Financial. Sometime shortly after a September 27 board of directors meeting, MET is to file a Form S-1 or Form 10 with the SEC. The S-1 filing, which is required for companies ahead of an initial public offering, should outline the allocation of capital between RemainCo MetLife and the new retail-focused Brighthouse Financial, and allow investors to put a finer point on the valuation of both entities. We note the filing of an S-1 does not preclude MET from later filing a Form 10 registration if the board decides to go the share exchange or spin route. We list some of the options available to MET, along with our view of the pros and cons of each option below Tax-free spin. Under Section 335 of the Internal Revenue Code, companies are allowed to make tax-free

distributions of stock of subsidiaries if certain requirements are met around control, device, active trade or business, and distribution. The spirit of the requirements is to ensure that the spin is not a vehicle for tax-advantaged earnings distribution, and to make sure that the former parent distributes its entire ownership in the spinoff (or at least 80%). An example of a full tax-free spin in the life insurance sector was the 2005 spin of Ameriprise out of former parent American Express. At a recent investor conference, MET CFO John Hele referenced a trend in industrial companies of parents spinning greater than 80% ownership of subsidiaries and then letting the shares of the former subsidiary season before selling off the remaining interest to the public markets at a later date.

Examples of spins of greater than 80% but less than 100%, followed by later dispositions of shares include: o Cardinal Health spun off 81% of CareFusion Corp in 2009, and sold the remaining 19% in a block

trade the next year; o Ralcorp spun off approximately 80% of its interest in Post Holdings in 2012 in a transaction in which

Post Holdings borrowed $175 million and delivered a portion of the proceeds to Ralcorp. Ralcorp sold its remaining stake in Post later in 2012.

o Valero Energy Company spun off slightly more than 80% of its ownership of CST Brands, Inc. in 2014, followed by a public offering for the remainder later that year.

o Dean Foods spun out 80.1% of its ownership interest in WhiteWave in 2013, followed by a tax-free debt-for-equity exchange later that year.

In the healthcare sector, Baxter International spun out 80.6% of an entity comprised of its biosciences division called Baxalta in 2016. After the spin, Baxter received $4 billion of dividends. In January of this year, Baxter reduced its ownership of Baxalta to 13.8% via a public offering. After a third party emerged to make a bid for Baxalta, Baxter exited its Baxalta stake in May of this year via an exchange offer.

While some investors believe a total spin is attractive for MET because it has the advantage of being quick and final, we note that MET would receive no proceeds from such a transaction. If MET does choose to employ the spin route, we think it is more likely that the company spins a little over 80% of Brighthouse in 1Q17 and then waits until Brighthouse shares season before disposing of the remaining stake via public offering and/or exchange offer.

Carve Out (IPO). Another option available to MET life is a carve-out of Brighthouse, which would take

the form of an IPO. In theory, MET could sell all of its ownership in Brighthouse at once in an initial public offering, but the experience of Genworth (carved out of GE), Primerica (carved out of Citigroup) and Voya (carved out of ING) suggests that a more likely scenario would be a partial IPO followed by subsequent public secondary offerings or privately-negotiated share sales.

The pros to a carve-out versus a spin would include a price discovery mechanism for Brighthouse shares as well as absence of the selling pressure on Brighthouse shares that might result from a spin. The cons include a longer exit process, which in this case might further delay MET’s ability to engage in capital management. Additionally, the delay in MET completely exiting Brighthouse could act as an overhang on Brighthouse shares as the market waits for the former parent to sell down its ownership.

Split Off (Exchange Offer). A third option for separation is a split-off, also known as an exchange

offer. In this option, MET shareholders would have the option of tendering for exchange some, none or all of their shares for shares of Brighthouse. This option can act as a back door share repurchase since parent shares tendered and accepted for exchange reduce the share count of that company. GE initiated an exchange offer for shares of Synchrony Financial in 2015 after partially carving out Synchrony in a 2014 IPO in which GE sold 20% of the shares.


46

The pros to a split off is that the form is efficient; MET shareholders who want to own MET can own MET and shareholders who want to own Brighthouse can own Brighthouse. Additionally, if the exchange offer is oversubscribed, MET can reduce its float in an exchange offer. The cons are that there is no guarantee that investors who want shares of Brighthouse will be able to obtain the allocation they want.

Freeing up capital for deployment. If we keep things simple and assume MET does a complete spin of Brighthouse, we believe Brighthouse should have around $240 billion of total assets after the spin, including some of the assets in (1) the Corporate Benefit Funding and Corporate and Other segments, (2) variable annuities with living benefit guarantees, and (3) U.S. universal life with secondary guarantee. Assuming a 5% capital ratio on a GAAP basis, this means the total capital supporting the liabilities should be around $12 billion. We think Brighthouse would be a debt issuer itself and if the new entity decided to maintain a 25% leverage ratio, this means it could issue roughly $3 billion of long-term debt. In addition, this issuance of debt could happen before and/or after the spin takes place (similar to VOYA’s debt issuance pre- and post-IPO). As a result, there could be around $9 billion of equity capital going from MET to the SpinCo. We think over time Brighthouse would be capitalized similar to peers that are also active players in the variable annuity marketplace, including Jackson National Life (481% RBC), Lincoln Financial (487% RBC), and Prudential Financial (486% RBC).

Since there is no debt allocation to the SpinCo, we expect the go-forward MET’s debt-to-total capital ratio could increase to over 26% from 23.5% at the end of Q2 2016 given a smaller equity base. For a short period at the least, we believe the ratings agencies will give the RemainCo a grace period to bring its debt-to-capital ratio back to 25% or lower. By paying down the $2 billion of senior debts come due in December 2017 and August 2018, we think the RemainCo could bring its debt-to-capital ratio closer to 24%. Still, given the expected reduction in capital and compliance burden associated with the spin, we think the go-forward MET should have the flexibility to resume its share repurchase program later in 2016.

A lower RBC target post separation given less sensitivity to macro. At year-end 2015, MetLife’s NAIC-based combined RBC ratio was 537%. Post separation, the remaining businesses in the go-forward MET would be more focused on mortality and morbidity underwriting. We think Brighthouse will be capitalized to a level commensurate with its peers. While the target RBC ratio going forward might not be as low as Torchmark’s 325%, we think over time it should gravitate toward 400% or lower given its lower sensitivity to macroeconomic factors including interest rates and equity market performance. In the U.S., post spin the go-forward MetLife should focus even more intently on its group business, where the company has long been the market leader. Globally, the go-forward MET should continue to do business in a mix of mature and emerging markets to drive growth and generate attractive returns.

Investment Risks

Potential reversal of favorable SIFI ruling on appeal. On October 24, the D.C. Court of Appeals Court will hear the Government’s appeal of a trial court ruling in the case of MetLife, Inc. v. Financial Stability Oversight Council. In March, the trial court judge unexpectedly ruled in favor of MetLife in its appeal of the Systemically Important Financial Institution (SIFI) tag. Judge Rosemary Collyer ruled that the Financial Stability Oversight Council (FSOC) departed from standards it had adopted when designating MET as systemically important, and never proved that MET could pose a threat to the financial stability of the United States. Additionally, Judge Collyer found FSC was “arbitrary and capricious” in not considering a cost-benefit analysis for MET.

MET’s appellee brief filed ahead of the October hearing was authored by attorney Eguene Scalia of Gibson, Dunn & Crutcher and presents forceful arguments to uphold the trial court’s ruling. On the other side, a host of parties including Dodd-Frank authors Barney Frank and Chris Dodd filed amici briefs on behalf of the government. As is often the case in these appeals, the probability of MET prevailing depends in part on the ideological slant of the judges comprising the three-judge panel hearing the case. If MET were to lose on appeal (and the case was not taken up for review by the US Supreme Court), there is a risk the company could be re-designated as a non-bank SIFI.

Persistent low interest rates. Within the variable annuity book with guaranteed living benefits (which importantly is largely going with Brighthouse) for GAAP purposes MET now assumes 10-year U.S. Treasury interest rates start at June 30, 2016 levels and increase to 4.25% by 2027, and that long-term separate account returns are 6.75% to 7.0%. If MET does not separate Brighthouse Financial and the 10-year Treasury yield never breaks north of 4%, the company will be subject to further rounds of reserve charges.

Separation execution risk. The planned separation of Brighthouse Financial comes with execution risk. There is no guarantee the company will be successful in its attempt to split off Brighthouse, spin Brighthouse off to existing shareholders, or complete and exchange offer.


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Company Overview The predecessor company to MetLife was National Union Life and Limb Insurance Company, which was founded in 1863 with $100,000 raised by a group of New York City businessmen. The stock life insurance company was mutualized in 1915 but eventually went public in 2000. MetLife is now a global provider of life insurance, annuities, employee benefits and asset management, and holds leading market positions in the United States, Japan, Latin America, Asia, Europe and the Middle East through its subsidiaries and affiliates. MetLife is organized into six segments, reflecting three broad geographic regions: The Americas (which include Retail; Group, Voluntary and Worksite Benefits; Corporate Benefit Funding; and Latin America); Asia; and Europe, the Middle East and Africa (EMEA). In addition, the company reports certain of its results of operations in Corporate & Other. The company is currently pursuing the separation of a substantial portion of its Retail segment, which is organized into two U.S. businesses, Life & Other and Annuities, as well as certain portions of its Corporate Benefit Funding segment and Corporate & Other. The separated business will be rebranded as “Brighthouse Financial” after the separation. Exhibit 4. Operating Earnings (Ex. Corporate And Other) By Segment, 2015

The Americas -Retail Products,

35.6%

The Americas -Group,

Voluntary and Worksite

Benefits, 13.3%

The Americas -Corporate

Benefit Funding, 20.2%

The Americas -Latin America,

8.3%

Asia, 19.1%

EMEA, 3.5%



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Summary Business Unit Discussion The Americas - Retail. MetLife’s Retail segment offers a broad range of protection products and services and a variety of annuities to individuals and employees of corporations and other institutions, and is organized into two U.S. businesses: Life & Other and Annuities. The retail businesses that are written out of non-New York statutory entities are to form the base of the NewCo Brighthouse Financial. Life & Other insurance products and services include variable life, universal life, term life and whole life products. In addition, through broker-dealer affiliates, the company offers a full range of mutual funds and other securities products. Life & Other products and services also include individual disability income products and personal lines property & casualty insurance, including private passenger automobile, homeowners and personal excess liability insurance. Annuities includes a variety of variable, fixed and indexed annuities which provide for both asset accumulation and asset distribution needs. Exhibit 5. Life & Other Adjusted After-Tax Operating Earnings And Margin ($ in millions)

Exhibit 6. Annuities Adjusted After-Tax Operating Earnings And ROA ($ in millions)

$646 $823 $989 $1,140 $979 $403

5.1%

6.4%

7.5%

8.5%

7.4%

6.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

$0

$200

$400

$600

$800

$1,000

$1,200

2011 2012 2013 2014 2015 H1 2016

$688 $1,116 $1,446 $1,574 $1,625 $758

0.41%

0.60%

0.72%0.75%

0.79%

0.75%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC The Americas - Group, Voluntary & Worksite Benefits. The company’s Group, Voluntary & Worksite Benefits (GVWB) segment offers a broad range of protection products and services to individuals and corporations, as well as other institutions and their respective employees. Group, Voluntary & Worksite Benefits insurance products and services include life, dental, group short- and long-term disability and accidental death and dismemberment coverages. In addition, the Group, Voluntary & Worksite Benefits segment offers property & casualty insurance, including private passenger automobile, homeowners and personal excess liability, which is offered to employees on a voluntary basis, long-term care, critical illness, vision and accident & health coverages, as well as prepaid legal plans. Exhibit 7. GVWB Adjusted After-Tax Operating Earnings And Margin ($ in millions)

Exhibit 8. Corporate Benefit Funding Adjusted After-Tax Operating Earnings And ROA ($ in millions)

$891 $993 $924 $855 $913 $419

5.3%5.6%

5.1%4.5% 4.7%

4.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

$0

$200

$400

$600

$800

$1,000

$1,200

2011 2012 2013 2014 2015 H1 2016

$1,112 $1,224 $1,295 $1,458 $1,387 $656

0.62%0.64% 0.68%

0.74%

0.70%

0.65%

0.56%0.58%0.60%0.62%0.64%0.66%0.68%0.70%0.72%0.74%0.76%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC The Americas - Corporate Benefit Funding. MetLife’s Corporate Benefit Funding segment offers a broad range of annuity and investment products, including guaranteed interest contracts and other stable value products, income annuities and separate account contracts for the investment management of defined benefit and defined contribution plan assets. This segment also includes structured settlements and certain products to fund postretirement benefits and company-, bank- or trust-owned life insurance used to finance nonqualified benefit programs for executives.


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The Americas - Latin America. MetLife’s Latin America segment offers a broad range of products to individuals and corporations, as well as other institutions and their respective employees, which include life insurance, accident & health insurance, group medical, dental, credit insurance, endowment and retirement & savings products written in Latin America. The Latin America segment also includes U.S. direct business, comprised of group and individual products sold through sponsoring organizations, affinity groups and direct to consumer. Products included from the U.S. direct business are life, dental, group short- and long-term disability, AD&D coverages, property & casualty and other accident & health coverages, as well as non-insurance products such as identity protection. Exhibit 9. Latin America Adjusted After-Tax Operating Earnings And Margin ($ in millions)

Exhibit 10. Asia Adjusted After-Tax Operating Earnings And Margin ($ in millions)

$514 $583 $573 $567 $572 $284

11.9%12.7%

11.3%10.2%

11.2% 11.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

$0

$100

$200

$300

$400

$500

$600

$700

2011 2012 2013 2014 2015 H1 2016

$1,112 $1,224 $1,295 $1,458 $1,387 $656

0.62%0.64% 0.68%

0.74%

0.70%

0.65%

0.56%0.58%0.60%0.62%0.64%0.66%0.68%0.70%0.72%0.74%0.76%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Asia. The Asia segment offers a broad range of products to individuals and corporations, as well as other institutions and their respective employees, which include whole life, term life, variable life, universal life, accident & health insurance, fixed and variable annuities, credit insurance and endowment products. EMEA. The EMEA segment offers a broad range of products to individuals and corporations, as well as other institutions and their respective employees, which include life insurance, accident & health insurance, credit insurance, annuities, endowment and retirement & savings products.

Exhibit 11. EMEA Adjusted After-Tax Operating Earnings And Margin($ in millions)

$251 $272 $330 $285 $240 $127

7.2%7.7%

9.7%

8.0%8.2% 9.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

$0

$50

$100

$150

$200

$250

$300

$350

2011 2012 2013 2014 2015 H1 2016Source:

Company data and Wells Fargo Securities, LLC


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Investment Portfolio MetLife manages its investment portfolio using disciplined asset-liability matching (ALM) principles, focusing on cash flow and duration to support our current and future liabilities. The company’s intent is to match the timing and amount of liability cash outflows with invested assets that have cash inflows of comparable timing and amount, while optimizing risk-adjusted net investment income and risk-adjusted total return. MET’s investment portfolio is heavily weighted toward fixed income investments, with over 80% of its portfolio invested in fixed maturity securities and mortgage loans. MetLife also uses derivatives as an integral part of its management of the investment portfolio to hedge certain risks, including changes in interest rates, foreign currency exchange rates, credit spreads and equity market levels. In addition, the general account investment portfolio includes, within FVO and trading securities, contract holder-directed unit-linked investments supporting unit-linked variable annuity type liabilities, which do not qualify as separate account assets. The primary investment objectives of the Closed Block division include: (1) providing for the reasonable dividend expectations of the participating policyholders within the Closed Block division, and (2) optimizing total return, including both investment income yield and capital appreciation, within risk constraints, while managing the market risk exposures associated with the major products in the Closed Block division. Exhibit 12. Investment Portfolio By Asset Class, 6/30/2016

29.22%

13.25%

12.44%

12.38%

11.11%

5.54%

3.11%

3.04%2.55%

2.01% 1.75% 1.62% 1.38%0.43% Securities Owned: Corporate

Debt



Mortgage Loans

Securities Owned: OtherGovernments

Other Investments


Cash & Investments

Securities Owned: OtherInvestments



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Capital Profile We summarize the financial strength ratios of MetLife’s primary companies below. Exhibit 13. Financial Strength Ratings of Primary Companies

AM Best Fitch Moody's S&P

American Life Insurance Company - - A1 AA-First MetLife Investors Insurance Company A+ - - A+General American Life Insurance Company A+ AA- Aa3 AA-MetLife Insurance Company USA A+ AA- Aa3 A+Metropolitan Life Insurance Company A+ AA- Aa3 AA-MetLife Insurance K.K. (MetLife Japan) NR NR NR AA-New England Life Insurance Company A+ AA- Aa3 A+



Steven Albert Kandarian Chairman, President & CEO 64 Joined in 2005; Was CIO 0.03

John Carroll Ramsey Hele Executive VP & CFO 63 Joined in 2012; Was CFO of ACGL and ING 0.00

Source: Company data and Wells Fargo Securities, LLC Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the current company configuration, and include the following key assumptions: Share repurchases of $60 million, $2.1 billion and $2.3 billion for full year 2016E, 2017E, and 2018E Consolidated operating EPS annual growth of 26.2% in 2017E and 10.4% in 2018E GVWB pretax operating earnings growth of 4.8% in 2017E and 0.5% in 2018E Corporate Benefit Funding pretax operating earnings growth of 4.8% in 2017E and -1.1% in 2018E Latin America pretax operating earnings growth of 16.8% in 2017E and 11.2% in 2018E Asia operating earnings growth of 9.1% in 2017E and 6.9% in 2018E EMEA operating earnings growth of 59.3% in 2017E and 9.0% in 2018E Corporate and Other operating losses of $824 million in 2017E and $806 million in 2018E Annualized equity market return of 8% Tax rate of 26.5% for full year 2017E and 26.6% for 2018E.


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Exhibit 15. MetLife (MET) Income Statement Model $ Millions Except Per Share Data


OVERVIEW

After-tax Operating IncomeLife & Other 990 1,219 859 172 (27) (15) 263 392 885 1,079

Annuities 1,535 1,597 1,589 360 211 410 434 1,417 1,726 1,774

The Americas - Retail Products 2,525 2,816 2,448 532 184 395 697 1,810 2,611 2,853

The Americas - Group, Voluntary and Worksite Benefits 963 879 911 174 221 230 227 852 892 941

The Americas - Corporate Benefit Funding 1,295 1,458 1,387 295 302 327 306 1,230 1,289 1,289

The Americas - Latin America 573 567 572 137 128 123 135 523 612 683

Total The Americas 5,356 5,720 5,318 1,138 835 1,075 1,365 4,415 5,404 5,766Asia 1,244 1,307 1,312 305 259 338 318 1,220 1,332 1,424

EMEA 330 285 240 63 64 86 75 281 447 488

Corporate & Other (667) (752) (1,455) (177) (234) (218) (225) (854) (824) (806)

Consolidated After-tax Operating Income 6,263 6,560 5,415 1,329 924 1,280 1,533 5,062 6,359 6,872

Operating EPS $5.61 $5.74 $4.86 $1.20 $0.83 $1.15 $1.38 $4.56 $5.75 $6.35% Change 6.2% 2.3% -15.4% -16.9% -46.7% 84.9% 12.2% -6.2% 26.2% 10.4%

Actual and Diluted Share Calculations:Weighted Average Common Shares Outstanding 1,105.9 1,129.0 1,118.3 1,100.8 1,100.3 1,101.8 1,103.8 1,101.7 1,087.8 1,056.6Weighted Average Diluted Shares Outstanding 1,116.5 1,142.8 1,128.9 1,108.6 1,109.1 1,110.0 1,113.9 1,110.4 1,105.5 1,082.2

Dollar Amount of Share Repurchases 0.00 1,025.16 1,927.00 60.00 0.00 0.00 0.00 60.00 2,098.37 2,267.86

Dividend Activity:Dividend Per Share 1.01 1.33 1.48 0.38 0.40 0.40 0.40 1.58 1.75 1.95Ann. Payout Ratio 18% 23% 30% 0% 0% 0% 0% 35% 30% 31%(Div+Share repurchase) as % of operating earnings 18% 38% 66% 0% 0% 0% 0% 35% 63% 63%

Book Value and ROE Calculations:Book Value (Excl. AOCI) $48.49 $52.44 $55.66 $57.21 $56.86 $57.34 $58.04 $58.04 $61.80 $65.81Book Value (Excl. AOCI other than FCTAs) $47.01 $49.53 $51.15 $53.31 $53.20 $53.45 $54.39 $54.39 $58.04 $61.94Book Value (Incl. AOCI) 53.04 61.85 60.00 67.10 70.18 70.63 71.31 71.31 75.47 79.87

Ann. Operating ROE (Excl. AOCI) 11.9% 11.5% 8.9% 8.6% 5.9% 8.2% 9.7% 8.1% 9.8% 10.2%Ann. Operating ROE (Excl. AOCI other than FCTA) 12.1% 12.0% 9.6% 9.3% 6.3% 8.7% 10.3% 8.7% 10.4% 10.9%Total Ann. Return on Avg. Equity 6.0% 10.4% 8.3% 14.2% 0.4% 6.8% 8.4% 7.4% 9.4% 9.9%

Abbreviated Balance Sheet:

Total investments 488,779 505,995 495,459 524,727 543,511 543,511 543,511 543,511 543,511 543,511Other assets 79,316 79,348 80,876 86,654 89,384 94,460 101,552 101,552 118,714 137,377Separate account assets 317,201 316,994 301,598 306,047 309,672 309,672 309,672 309,672 309,672 309,672Total assets 885,296 902,337 877,933 917,428 942,567 947,643 954,735 954,735 971,897 990,560 xEquity excl separate account 9x 8x 8x 8x 8x 8x 8x 8x 8x 8x

Total debt 22,021 19,579 21,317 21,183 19,857 19,857 19,857 19,857 19,857 19,857Other liabilities 483,091 493,105 486,522 514,233 533,665 538,106 544,311 544,311 559,325 575,654Separate account liabilities 317,201 316,994 301,598 306,047 309,672 309,672 309,672 309,672 309,672 309,672Total liabilities 822,313 829,678 809,437 841,463 863,194 867,635 873,840 873,840 888,854 905,183 xEquity excl separate account 8x 7x 7x 7x 7x 7x 7x 7x 7x 7x

Total equity 62,983 72,659 68,496 75,965 79,373 80,008 80,895 80,895 83,042 85,377Non-controlling interest 1,430 606 547 190 194 194 194 194 194 194Total shareholders' equity 61,553 72,053 67,949 75,775 79,179 79,814 80,701 80,701 82,848 85,183

Source: Company data and Wells Fargo Securities, LLC estimates The external website links included in this publication are not maintained, controlled or operated by Wells Fargo Securities. Wells Fargo Securities does not provide the products and services on these websites and the views expressed on these websites do not necessarily represent those of Wells Fargo Securities. Please review the applicable privacy and security policies and terms and conditions for the website you are visiting. Company Description:

MetLife, Inc. is an insurance-based global financial services company providing protection and investment products to a range of individual and institutional customers. In addition to offering individual insurance, annuity, and investment products, the company provides group insurance and retirement and savings products and services. MetLife holds leading market positions in the U.S., Japan, Latin America, Asia, Europe and the Middle East.

WELLS FARGO SECURITIES, LLC Torchmark Corp. EQUITY RESEARCH DEPARTMENT

53

Torchmark Corp. TMK: Resuming Coverage With An Underperform Rating Not Even The Japanese Pay A Premium to 2x Book Value Summary: We are resuming coverage on Torchmark with an Underperform

rating, a change in analyst, and a valuation range of $56-$58 per share. Our EPS estimates are $4.47 for 2016 and $4.71 for 2017. As a defensive play, the stock has worked in recent years due to its consistent profitability, return of capital, and profile as a takeout candidate. However, we think TMK’s valuation premium has expanded to a point that can no longer be justified given its contracting ROE.

The valuation premium is unjustified. To us, the market has rewarded the stock in part for its defensive nature this year to the point where we think the premium can no longer be justified. Based on our regression analysis on P/BV and ROE for the U.S. life industry, Torchmark is a notable outlier that trades at a significant premium versus peers. Additionally the stock is trading above one standard deviation from both its three-year average price-to-book value and price-to-earnings multiple.

Contracting ROE. Our estimates for 2016, 2017 and 2018 EPS are only slightly (2.3% or less) lower than consensus, and we are forecasting operating ROE to contract from 14.2% in 2015 to 13.6% in 2018. The contracting ROE is a function in part from excess investment income growing more slowly than underwriting income. While we are comfortable with TMK sitting above its’ implied price-to-book multiple due to the lower volatility of its business model, we don’t think its current premium is warranted given the contracting ROE trajectory.

We don’t think TMK will be acquired in the near term. Torchmark’s valuation reflects a takeout premium, something that management acknowledged on the Q4 2015 earnings conference call. Over the past three years, there have been a series of acquisitions of SMID cap life insurers by Japanese acquirers, and in many ways Torchmark fits the bill of what Japanese acquirers look for. However, we think the appetite of Asian buyers for U.S. life insurance companies could be subdued in the near term as outbound M&A from Japan has slowed in general and the environment in China is uncertain. In short, we just don’t see it makes sense to embed a high takeout premium in TMK shares.

We still like its model. We don’t believe Torchmark is a structural short. In fact, we like its relatively simple business model, which is driven by underwriting results. We also recognize that the company's plain vanilla investment portfolio that draws lower risk charges from regulators and allows the company to run at a relatively low 325% risk-based capital (RBC) level, which is a positive.

Q3 2016 preview. TMK’s results should remain relatively stable.

Valuation Range: $56.00 to $58.00 from NE to NE Our range is based on a price-to-book multiple of 1.6x applied to our Q3 2017E BVPS of $35 ex. accumulated other comprehensive income. Risks to our range include favorable mortality, improving asset quality, and falling interest rates. Investment Thesis: We rate TMK shares Underperform. We think the stock should trade at a lower valuation premium given its contracting return on equity and less chance to be acquired in the near term.

Underperform


Market Weight



Operating EPS

Ticker TMK

Price (09/22/2016) $64.86 52-Week Range: $48-66 Shares Outstanding: (MM) 119.8 Market Cap.: (MM) $7,772.6 S&P 500: 2,178.01 Avg. Daily Vol.: 464,317 Dividend/Yield: $0.56/0.9% LT Debt: (MM) $1,134.0 LT Debt/Total Cap.: 25.0% ROE: 14.0% 3-5 Yr. Est. Growth Rate: 8.0% CY 2016 Est. P/E-to-Growth: 1.8x Last Reporting Date: 04/26/2016






54

Investment Thesis Torchmark is a solidly run business that makes profit in a straightforward and consistent manner -- by making an underwriting margin and not taking outsized risks in the investment portfolio. As a defensive play, the stock has worked in recent years but we do not find the risk-reward attractive here especially in the absence of a take out. If long-term interest rates do rise, we would expect Torchmark to be used as a source of funds for other life insurance stocks. Valuation Our valuation range of $56-58 is based on a 1.6x multiple of our 12-month forward book value estimate of $35.45, which we think is appropriate given contracting ROE, and still represents a slight premium to the 1.3x P/BV multiple implied by our P/BV versus ROE regression. TMK shares are trading more than one standard deviation above its three-year average price-to-book and NTM price-to-earnings multiples, at roughly 2.1x and 13.8x, respectively. Exhibit 1. TMK Price-To-Book (ex AOCI) Multiples Exhibit 2. TMK’s Price-To-Earnings Multiples

2.10x

Average, 1.96x

1.5x

1.6x

1.7x

1.8x

1.9x

2.0x

2.1x

2.2x

2.3x

Se

p-13

De

c-13

Ma

r-1

4

Jun

-14

Se

p-14

De

c-14

Ma

r-1

5

Jun

-15

Se

p-15

De

c-15

Ma

r-1

6

Jun

-16

Se

p-16

Pric

e to

Boo

k (e

x AO

CI)

TMK

TMK Average

13.84x

Average, 12.61x

10.0x

10.5x

11.0x

11.5x

12.0x

12.5x

13.0x

13.5x

14.0x

14.5x

15.0x

Se

p-13

Dec

-13

Mar

-14

Jun

-14

Se

p-14

Dec

-14

Mar

-15

Jun

-15

Se

p-15

Dec

-15

Mar

-16

Jun

-16

Pric

e to

NTM

Ear

ning

s

TMK

TMK Average

Source: FactSet, company data and Wells Fargo Securities, LLC


55

Investment Opportunities The valuation premium is unjustified. To us, the market has rewarded the stock in part for its defensive nature this year to the point where we think the premium can no longer be justified. Based on our regression analysis on P/BV and ROE for the U.S. life industry, Torchmark is a notable outlier that trades at a significant premium versus peers. Additionally the stock is also the only one in our universe trading above one standard deviation from both its three-year average price-to-book value and price-to-earnings multiple. Exhibit 3. TMK Shares Should Command A Lower Valuation Premium, In Our View

AFL

AELCNO

FGL

GNW

LNCMET

PRI

PFG

PRU

RGA

TMK

VOYA

UNM

y = 0.1806e14.469x

R² = 0.8641

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

0.0% 5.0% 10.0% 15.0% 20.0%

P/B

(2

01

6E)

2017E ROE

P/B (2016E) vs. 2017E ROE

Source: Company data and Wells Fargo Securities, LLC estimates Contracting ROE. Our estimates for 2016, 2017 and 2018 EPS are only slightly (2.3% or less) lower than consensus, and we are forecasting operating ROE to contract from 14.2% in 2015 to 13.6% in 2018. The contracting ROE is a function in part from excess investment income growing more slowly than underwriting income. Absent a divestiture or acquisition, ROE would continue to decline. While we are comfortable with TMK sitting above its’ implied price-to-book multiple due to the lower volatility of its business model, we don’t think its current premium is warranted given the contracting ROE trajectory. Exhibit 4. We are modeling declining ROE

15.1% 15.0%

14.6%

14.2% 14.1%

13.7% 13.6%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

2012 2013 2014 2015 2016E 2017E 2018E

Operating ROE

Source: Company data and Wells Fargo Securities, LLC estimates We don’t think TMK will be acquired in the near term. There hasn’t been a large domestic acquisition of the size of TMK for a long time and we don’t think there will be one anytime soon given the continued low interest rates in the U.S. In addition, we think the appetite of Asian buyers for U.S. life insurance companies could be subdued in the near term as valuation of financial companies in Japan and China has become more attractive. In short, we just don’t see it makes sense to embed a high takeout premium on TMK shares.


56

Investment Risks Strong cash flow and consistent return of capital. We still like its model. We don’t believe Torchmark is a structural short. In fact, we like its relatively simple business model, which is driven by underwriting results. We also recognize that the company's plain vanilla investment portfolio that draws lower risk charges from regulators and allows the company to run at a relatively low 325% risk-based capital (RBC) level, which is a positive. Exhibit 5. Over the past 10 years, TMK has returned 83% of net income to shareholders ($ in millions)

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015 1H

…

Div

Sh Rep

NetIncome

Source: Company data and Wells Fargo Securities, LLC Where could we be wrong? If Torchmark could find a smallish life insurer with distribution to acquire and make the deal immediately accretive, ROE contraction would be slowed. Conversely, TMK has the type of business model that has been attractive to Japanese acquirers, and a risk to our thesis would be a change in corporate control. Separately, if long-term interest rates were to retrace even lower from current levels Torchmark would still experience ROE contraction from lower investment income but would continue to outperform life insurers with more balance sheet exposure to low rates. Sensitivity to economic conditions. Torchmark serves primarily the middle-income market for individual protection life and health insurance. As a result, the company competes directly with alternative uses of a customer’s disposable income. During a sustained economic upturn, disposable income within the middle-income group could increase. In addition, new sales of Torchmark’s insurance products could also increase due to less limitation on the use of disposable income.


57

Company Overview Torchmark Corporation was founded in 1900 in Birmingham, Alabama and now based in McKinney, Texas. The insurance holding company was incorporated in Delaware in 1979. Torchmark provides life insurance, annuity, and supplemental health insurance products through wholly owned subsidiaries, including American Income Life Insurance Company (American Income), Liberty National Life Insurance Company (Liberty National), Globe Life And Accident Insurance Company (Globe), United American Insurance Company (United American), and Family Heritage Life Insurance Company of America (Family Heritage). The company markets its insurance products through multiple distribution channels, including direct response, exclusive Agency, and independent systems. Summary Business Unit Discussion Underwriting income. Torchmark’s insurance subsidiaries write a variety of nonparticipating ordinary life insurance products. These include traditional and interest sensitive whole-life insurance, term life insurance, and, other life insurance. In addition, the company offers limited-benefit supplemental health insurance products that include primarily critical illness and accident plans. These policies are designed to supplement health coverage that applicants already own. Medicare Supplements are also offered to enrollees in the traditional fee-for-service Medicare program. Medicare Supplement plans are standardized by federal regulation and are designed to pay deductibles and co-payments not paid by Medicare. Exhibit 6. Life and Health Underwriting Income By Distribution Channel, 2015

LNL Exclusive Agency, 13.0%

Direct Response,

24.9%

American Income Agency,

48.8%

Family Heritage Life, 0.1%

Other Distribution,

13.2%

Life Underwriting Income By Distribution Channel

LNL Exclusive Agency, 22.4%

UA Independent,

32.0%Direct

Response, 5.6%

American Income Agency,

17.0%

Family Heritage Life, 23.0%

Health Underwriting Income By Distribution Channel

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Excess Investment Income. The investment segment involves the management of Torchmark’s capital resources, including investments and the management of corporate debt and liquidity. The measure of profitability for the investment segment is excess investment income, which is: net investment income minus required interest on net policy liabilities and financing costs.


58

Exhibit 7. Total Excess Investment Income ($ in millions) Exhibit 8. Investment Portfolio By Asset Class, 6/30/2016

$259.0$236.6

$218.8 $225.1 $220.2

$109.3

2011 20.12 2013 2014 2015 H1 2016

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

83.35%

9.08%

3.12%

2.57% 0.76% 0.35%0.31%0.30% 0.16% 0.01% 0.01%

Securities Owned: CorporateDebt


Policy Loans



Other Investments


Short-term Investments


Source for both Exhibits: Company data and Wells Fargo Securities, LLC Investment Portfolio Torchmark’s current investment policy regarding fixed maturities limits new fixed maturity acquisitions to investment grade securities generally with longer maturities (often exceeding twenty years) that meet the company’s quality and yield objectives. Roughly 96% of the invested assets at fair value consist of fixed maturities of which 96% were investment grade at year-end 2015. The average quality rating of the portfolio was A-. The portfolio contains no securities backed by subprime or Alt-A mortgages, no direct investment in residential mortgages, no credit default swaps, or other derivative contracts. Policy loans, which are secured by policy cash values, make up approximately 4% of the company’s investments. Torchmark also has insignificant investments in equity securities, and other long-term investments. Capital Profile We summarize the financial strength ratios of Torchmark’s primary companies below. Exhibit 9. Financial Strength Ratings of Primary Companies


American Income Life Insurance Co.

Globe Life and Accident Insurance Co.

Liberty National Life Insurance Co.

United American Insurance Co.

A1 (OS)Affirm

10/9/2015

AA- (OS)Affirm

10/5/2015

A+ (OS)Affirm

12/15/2015

A+Affirm

6/24/2016

- AA- (OS)Affirm

10/5/2015

A+ (OS)Affirm

12/15/2015

A+Affirm

6/24/2016 - AA- (OS)

Affirm10/5/2015

A+ (OS)Affirm

12/15/2015

A+Affirm

6/24/2016

- AA- (OS)Upgrade

10/5/2015

A+ (OS)Affirm

12/15/2015

A+Affirm

6/24/2016 Source: Moody’s, S&P, Fitch, AM Best, and Wells Fargo Securities, LLC Management Below we provide a background of each key member of management, along with current stock ownership. Exhibit 10. Key Management


Gary Lee Coleman Co-Chairman & CEO 63 Joined in 1981 0.54Larry Mac Hutchison Co-Chairman & CEO 62 Joined in 1986 0.44Frank Martin Svoboda Executive VP & CFO 54 Joined in 2011 0.06



59

Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: Share repurchases of $327 million, $336 million and $360 million for full year 2016E, 2017E, and 2018E. Consolidated operating EPS annual growth of 5.4% in 2017E and 6.2% in 2018E. On an absolute basis, insurance underwriting income growth of 2.6% in 2017E and 3.4% in 2018E. On an absolute basis, total excess investment income growth of 0.7% in 2017E and -3.3% in 2018E. Tax rate of 32.9% for both full year 2017E and 2018E.


60

Exhibit 11. Torchmark (TMK) Income Statement Model ($ in millions, except as noted)Fiscal Year Ends December 31 2013 2014 2015 Q1 2016 Q2 2016 Q3 2016E Q4 2016E 2016E 2017E 2018EOperating SummaryUnderw riting IncomeLife:Premium 1,885.332 1,966.300 2,073.065 544.151 548.590 538.645 540.707 2,172.092 2,236.098 2,301.977Net Policy Obligations 719.621 763.192 822.310 220.849 225.717 216.328 215.885 878.780 903.391 936.172Commissions and Acquisition Expenses 620.652 646.619 681.353 179.002 179.269 177.472 178.528 714.271 735.632 757.551Underwriting Margin 545.059 556.489 569.402 144.300 143.604 144.844 146.293 579.041 597.076 608.253Health:Premium 863.818 869.440 925.520 235.697 237.252 234.894 241.400 949.243 979.706 1,013.812Net Policy Obligations 499.124 495.416 533.553 134.699 135.010 135.646 139.743 545.098 568.231 588.355Commissions and Acquisition Expenses 168.187 174.705 187.590 49.483 49.621 46.876 48.040 194.020 195.315 202.447Underwriting Margin 196.507 199.319 204.377 51.515 52.621 52.372 53.617 210.125 216.160 223.010Annuity Underw riting Margin 3.939 4.312 4.568 1.631 1.941 0.265 0.278 4.115 1.258 1.530

Total Underw riting Margin 780.805 787.386 798.235 197.446 198.166 197.481 200.188 793.281 814.494 841.556

Other Income 2.208 2.354 2.379 0.465 0.422 0.415 0.420 1.722 1.727 1.781Administrative Expenses (178.898) (179.955) (190.426) (48.468) (48.413) (49.506) (50.837) (197.224) (203.000) (209.313)Underwriting Income 604.115 609.785 610.188 149.443 150.175 148.389 149.771 597.779 613.221 634.023

Excess Investment IncomeNet Investment Income 734.650 758.286 773.951 197.053 201.642 202.594 199.890 801.179 814.702 822.073Net Policy Liabilities (435.363) (457.069) (477.132) (123.011) (123.935) (124.466) (125.506) (496.918) (509.518) (524.208)Interest on Debt (80.461) (76.126) (76.642) (19.369) (23.110) (20.944) (20.944) (84.367) (83.776) (83.776)Total Excess Investment Income 218.826 225.091 220.177 54.673 54.597 57.184 53.440 219.894 221.407 214.089Parent Companies (8.495) (8.159) (9.003) (2.026) 2.379 (2.261) (2.235) (4.144) (9.391) (9.542)

Pre Tax Operating Income 814.446 826.717 821.362 202.090 207.151 203.313 200.976 813.529 825.237 838.570Income Tax (267.112) (271.317) (269.205) (66.170) (65.313) (66.687) (65.920) (264.090) (271.503) (275.890)Tax Rate 32.8% 32.8% 32.8% 32.7% 31.5% 32.8% 32.8% 32.5% 32.9% 32.9% Net Operating Income Before Options Expense 547.334 555.400 552.157 135.920 141.838 136.626 135.056 549.440 553.734 562.681Options expense 16.667 20.932 18.632 2.536 0.390 0.393 0.395 3.714 1.605 1.645Net Operating Income from Continuing Operations 530.667 534.468 533.525 133.384 141.448 136.234 134.661 545.726 552.129 561.036Discontinued Operations, Net of Tax 0.000 0.000 0.195 1.976 2.058 2.000 2.500 8.534 10.000 10.000Net Operating Income from All Operations 530.667 534.468 533.720 135.360 143.506 138.234 137.161 554.260 562.129 571.036 Operating EPS from Continuing Operations $3.80 $4.03 $4.21 $1.08 $1.15 $1.12 $1.12 $4.47 $4.71 $5.00Operating EPS from All Operations $3.80 $4.03 $4.21 $1.10 $1.17 $1.14 $1.14 $4.54 $4.80 $5.09BVPS $28.06 $36.19 $32.71 $35.72 $39.87 $40.73 $41.43 $41.43 $44.74 $48.21BVPS excluding AOCI $26.51 $27.57 $30.09 $30.65 $31.11 $32.55 $33.17 $33.17 $36.12 $39.20Operating ROE 15.0% 14.6% 14.2% 13.9% 14.6% 13.9% 13.6% 14.0% 13.6% 13.2%Average Diluted Shares Outstanding 139.539 132.614 126.723 123.313 122.748 121.690 120.390 122.035 117.204 112.208# of shares repurchased 8.281 7.154 6.292 1.502 1.437 1.313 1.288 5.540 5.022 4.971$ share repurchase activity (millions) 360.000 375.000 358.600 80.000 83.000 82.000 82.000 327.000 336.000 360.000Net Income 528.472 542.939 527.100 124.033 143.187 138.234 137.161 542.614 562.129 571.036Net EPS $3.79 $4.09 $4.16 $1.01 $1.17 $1.14 $1.14 $4.45 $4.80 $5.09Balance Sheet ItemsTotal invested assets End of period 13,456.944 15,058.996 14,405.073 15,152.721 16,098.281 15,311.696 15,440.569 15,440.569 15,560.560 16,035.067Total actuarial liabilities End of period 11,647.995 12,130.353 12,681.718 12,830.645 12,979.228 13,086.919 13,197.067 13,197.067 13,299.624 13,705.186Multiple of LTM premiums 4.2 x 4.3 x 4.2 x 4.2 x 4.2 x 4.2 x 4.2 x 4.2 x 4.1 x 4.1 xLTM Premiums 2,749.150 2,835.740 2,998.585 3,036.418 3,069.813 3,095.284 3,121.336 3,121.336 3,215.804 3,315.789Debt Short-term 229.070 238.398 490.129 557.163 286.011 286.011 286.011 286.011 286.011 286.011 Long-term 990.865 992.130 743.733 743.953 1,133.928 1,133.928 1,133.928 1,133.928 1,133.928 1,133.928Total 1,219.935 1,230.528 1,233.862 1,301.116 1,419.939 1,419.939 1,419.939 1,419.939 1,419.939 1,419.939 Source: Company data and Wells Fargo Securities, LLC estimates Company Description:

Torchmark Corp. (TMK), based in McKinney, TX, is a leading seller of life and health insurance to middle market customers. Its subsidiary Globe Life and Accident is the largest direct-mail life insurance operation of any U.S. life insurer. In addition to selling direct, the company utilizes multiple distribution sources including exclusive agents, independent agents, and financial planners with specialties in targeting military and union member clients.

WELLS FARGO SECURITIES, LLC AFLAC Inc. EQUITY RESEARCH DEPARTMENT

61

AFLAC Inc. AFL: Resuming Coverage With A Market Perform Rating Summary: We are resuming coverage of Aflac Inc. (AFL) with a change in

analyst, a Market Perform rating and a valuation range of $73-77. Our EPS estimates are $6.85 for 2016 and $6.74 for 2017. While we recognize Aflac can continue to work as a defensive play if US rates stay low, negative rates in Japan could put a drag on the company’s margins. In addition, after benefitting from a strengthening yen YTD, we don’t see continued upward estimate revisions from further yen strengthening.

After climbing 22% versus the S&P 500 +6% YTD, we are content to wait for a more attractive entry point. With 75% of earnings coming from Japan and no income statement f/x hedging, AFL results and forward EPS estimates have been favorably impacted from the strengthening yen. Every one yen strengthening from the 2015 average rate of 120.99 per USD will add about $0.03 per share to EPS in 2016. Wells Fargo Securities Foreign Exchange Research has a 12-month USD/JPY forecast of 108, which implies a partial unwind of the tailwind experienced on the way to 100.

Negative interest rates in Japan are a headwind. As the natural rate of third-sector (cancer and medical) sales slowed in Japan, Aflac looked to first sector products (savings and protection) to maintain top-line growth. First-sector products produce lower margins to begin with, and that margin compression is compounded in a negative-interest rate environment. Aflac is repricing its WAYS product in 2016 and other first sector products in 2017, but we would prefer AFL to stop selling spread product altogether.

High persistency and solid underwriting margins. Aflac’s earnings growth outpaces its premium growth through high persistency and underwriting margin expansion. The premium persistency rate in Japan has stayed at or above 94% since 2002 while the total benefit ratio has fallen from 82% to around 72%.

Aflac is a dividend aristocrat. In a lower-for-longer interest rate environment, investors will likely continue to seek out equities that provide yield with dividend growth. While Aflac’s dividend yield of 2.2% is only slightly above the S&P 500’s yield of 2.0% Aflac certainly has a track record of dividend increases: the company has grown its common dividend per share for 33 consecutive years. We are assuming a steady 26% payout ratio in 2016-2018, which implies annual dividend per share increases of 6%, 7% and 7% respectively.

Q3 Preview. We are forecasting Q3 2016 EPS of $1.77 versus consensus of $1.74. Our estimate reflects the strengthening yen in Q3, and incorporates pretax margins of 20.6% for Aflac Japan and 18.8% for Aflac U.S in the quarter. In addition, we expect 3rd sector sales in Japan to decline 5% in Q3 versus the prior year quarter, and 1st sector sales to up a modest 1% year over year.

Valuation Range: $73.00 to $77.00 from NE to NE Our valuation range is based on applying roughly 1.8x price to book multiple on our 12-month forward BVPS estimate of $42, ex. FX translation and gain/loss on securities. Risks to our valuation range include U.S. and Japanese sales weakness, higher-than expected loss costs, a weaker yen, and asset quality deterioration. Investment Thesis: While we recognize Aflac can continue to work as a defensive play if US rates stay low, we are content to sit on the sidelines at current levels given headwinds from negative rates in Japan and potentially from yen going forward.

Market Perform


Market Weight



operating EPS

Ticker AFL







62

Investment Thesis In our view, Aflac has completed the transition from growth stock to value stock and can be valued on price-to-book versus ROE. That being said, AFL throws off the highest ROE in our universe while its cost of capital is the lowest. The excess returns produced deserve a premium multiple in our view…the question is how much of a premium multiple. Since reported results are relatively unaffected by low U.S. interest rates and a strengthening yen acts as a tailwind, AFL shares have outperformed this year (+22%) versus the S&P 500 index (+6%). While we recognize Aflac can continue to work as a defensive play if U.S. interest rates stay low, Wells Fargo Securities Foreign Exchange Research has a 12-month USD/JPY forecast of 108, which implies a partial unwind of the tailwind experienced on the way to 100. At these levels, we are content to sit on the sidelines and wait for a more attractive entry point. Valuation Years of low-to-mid single digit growth EPS growth and a contraction of ROE from the mid-twenties range has left us comfortable using P/BV-to-ROE as our preferred basis of valuation. However, this exercise has been complicated in recent quarters by the impact of f/x translation associated with AFL’s capital hedge flowing through the balance sheet. Unlike PRU, which also has meaningful noise associate with the yen, AFL does not provide a book value per share ex-AOCI and ex-f/x translation impact, which has served to overstate book value and understate ROE. The effect can be seen below in Exhibits 1 and 2, where AFL’s PE ratio has climbed above one standard deviation above the three-year average while P/BV has lagged. Exhibit 1. AFL Price-To-Book (ex FAS 115) Multiples Exhibit 2. AFL Price-To-Earnings Multiples


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Source: FactSet, company data and Wells Fargo Securities, LLC Normalizing for estimated $2 per share of f/x translation associated with the capital hedge, AFL is trading at 1.7x book value ex. FAS 115, which we think is a tad light against a forecasted 18% ROE ex. f/x translation in 2017. We arrive at our valuation range of $73 - $77 by applying a 1.8x multiple against our 12-month forward book value per share estimate of $41.78, ex. f/x translation.


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Investment Opportunities Lower Beta, Lower Cost Of Capital and High ROE. Aflac has the lowest Beta in our coverage universe at 0.94, and the lowest cost of equity capital at 7.4%. Because Aflac issues low-interest rate Samurai bonds in Japan (where 75% of operating profit is generated), the company also enjoys a weighted average cost of capital advantage versus its US life insurance peers. AFL also generates the highest ROE in our universe, which by definition given its cost of capital means the company generates the highest “excess” return as well. High persistency and solid underwriting margins. Year in and year out, Aflac’s earnings growth outpaces its premium growth through high persistency and expansion in underwriting margins. The premium persistency rate in Japan has stayed at or above 94% since 2002 while the total benefit ratio (incurred claims and increase in benefits as a percentage of total premiums) has fallen from 82% to around 72%. During the same period, pre-tax margins in Japan have expanded from 12% to 21%. Owing to the ultra-low/negative interest rates environment in Japan, first sector products continue to put a drag on the company’s margins. To mitigate this downward pressure on margins, the company has shifted its sales focus back to 3rd sector products (from 31% of sales in 2012 to 66% year to date in 2016). Going forward, we expect Aflac Japan’s margins and persistency rate will remain solid at around 20% and 95%, respectively. Exhibit 3. Japan Has Driven Margin Expansion Exhibit 4. Unbroken Dividend Growth

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Source: Company data, FactSet and Wells Fargo Securities, LLC Aflac is a dividend aristocrat. In a lower-for-longer interest rate environment, investors will likely continue to seek out equities that provide yield with dividend growth. Aflac certainly fits the bill: the company has grown its common dividend per share for 33 consecutive years. We are assuming a steady 27% payout ratio in 2017-2018, which implies annual dividend per share increases of 7% and 7% respectively. Aflac does not meet G-SII criteria. The International Association of Insurance Supervisors (IAIS) has embarked on a project to identify and develop capital criteria for global systemically important insurers (G-SIIs). In a broad sense, we think of this future designation as a global Systemically Important Financial Institution (SIFI). As a provider of supplemental accident & health, Aflac does not meet IAIS criteria for designation as a G-SII, by size or interconnectedness. Investment Risks Low interest rates in Japan. The bank of Japan’s strategy of pursuing negative interest rates is a negative for Aflac. While it is true that Japan has been in a low-interest rate environment for many years, Aflac has insulated itself to a degree with differentiated investment strategies (foreign yen-denominated issuance and US corporate bonds hedged back to yen), and also the nature of third sector profitability, which is driven by underwriting margins. In Japan, life insurance is known as “first-sector” insurance, P&C insurance is known as second sector insurance, and cancer, medical and long-term care insurance is third sector insurance. But sales of first-sector products have introduced an element of spread earnings into AFL’s earnings, which have weighed on Japan pre-tax margin expansion—at the May investor day CFO Fred Crawford said first sector products are throwing off a margin of 11% versus 21% for the Japan business as a whole. As a response to interest rates actually turning negative, Aflac suspended sales of the hybrid WAYS products and certain child endowment products in the bank channel in May of this year and plans to recalibrate the


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assumed interest rate for child endowment products in April 2017. Aflac has also cut the rate of discounted advanced premium to 0.05% from 0.8%. Exhibit 5. Negative Gov’t Bond Yields (for now) Exhibit 6. Portfolio Yields Have Not Tracked JGB

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Source: Company data, FactSet and Wells Fargo Securities, LLC Our preference would be for Aflac to stop selling first sector products entirely. WAYS and child endowment together make up 18% of total inforce and life insurance (i.e. first sector) altogether makes up 36% of ¥8 trillion in statutory reserves. If those pieces of the pie were to grow on a relative basis, total pretax margins would be pressured more. The problem as Aflac describes it is that the customer demands a first-sector product offering. When an exclusive agency signs a contract to sell only Aflac products, they do so with the understanding they will be able to sell both first sector and third sector products to meet market demand. Yen could turn from a headwind to a tailwind. Every one yen strengthening from the 2015 average rate of 120.99 per USD will add about $0.03 per share to EPS in 2016. Wells Fargo Securities Foreign Exchange Research has a 12-month USD/JPY forecast of 106, which implies a partial unwind of the tailwind experienced on the way to 100. Exhibit 7. Wells Fargo Foreign Exchange Research Forecasts A Slight Weakening Of The Yen

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Note: Forecast in dotted line Source: FactSet and Wells Fargo Securities, LLC estimates Concentration of risk in Japan. Aflac’s Japanese operations account for roughly 70% of company revenues, 75% of earnings, and 83% of total assets. As such, Aflac has outsize exposure to the overall economy of Japan via foreign exchange rates and credit conditions, in addition to interest rates.


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Company Overview Aflac was founded in 1955 and is headquartered in Columbus, Georgia. CEO Dan Amos is the son and nephew of the founders of Aflac. The company operates in two geographies: the United States and Japan, with roughly 75% of company earnings generated in the latter country. Summary Business Unit Discussion Aflac Japan. In 2015, roughly 74% of Aflac’s total pretax earnings came from Japan. Insurance products offered by the company’s Japanese operations are designed to help consumers pay for medical and non-medical costs that are not reimbursed under Japan’s national health insurance system. A stagnated economy, coupled with an aging population, have put have put increasing pressure on Japan’s national health care system. As a result, more costs are being transferred to Japanese consumers. Aflac Japan sells voluntary supplemental insurance products, including cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans and annuities. Exhibit 8. 2015 Aflac Japan Sales By Product Exhibit 9. 2015 Aflac U.S. Sales By Product

Cancer, 40.4%

Medical, 26.3%

Child Endowment,

8.2%

WAYS, 16.6%

Ordinary Life Other, 6.3% Other, 2.2%

STD, 23.2%

Life, 5.2%

Accident, 29.9%

Critical Care, 21.9%

Hospital Indemnity, 14.7%

Dental/Vision, 5.2%

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Aflac US. Insurance products offered by Aflac U.S. provide supplemental coverage for people who already have medical or primary insurance coverage. Most of the company’s U.S. policies are individually underwritten and marketed through independent agents. In addition, Aflac U.S. started to market and administer group insurance products in 2009. In the U.S., the company sells to individuals and groups voluntary supplemental insurance products including products designed to protect individuals from depletion of assets (accident, cancer, critical illness/ care, hospital intensive care, hospital indemnity, fixed-benefit dental, and vision care plans) and loss-of-income products (life and short-term disability plans).


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Investment Portfolio Aflac’s investment strategy in the U.S. is not particularly different from its domestic peers. However, as Japan does not have a meaningful corporate bond market, the company’s investment strategy in Japan is necessarily different from its U.S. strategy. Aflac Japan's investment portfolios include dollar-denominated securities and reverse-dual currency securities (yen-denominated debt securities with dollar coupon payments). Due to of the concentration of business in Japan and the company’s need for long-dated yen-denominated assets, Aflac Japan has a substantial concentration of JGBs in its investment portfolio. Starting in 2012, Aflac Japan augmented its investment strategy to include U.S. dollar-denominated securities, which could then be hedged back to yen. Initially this program focused on public investment-grade bonds but has evolved over time to include U.S. dollar-denominated high yield corporate bonds, bank loans and middle market loans. As of year-end 2015, Aflac Japan held roughly $22.7 billion in U.S. dollar denominated income producing securities, at amortized cost, and around $14.3 billion of notional in foreign currency forwards and options to hedge principal currency risk. Exhibit 10. Investment Portfolio By Asset Class, 6/30/2016

42.86%

40.83%

9.49%

2.94%

1.40% 0.95% 0.93% 0.49% 0.11%Securities Owned: CorporateDebt


Securities Owned: Public Utilities





Other Investments


Source: Company data and Wells Fargo Securities, LLC Capital Profile We summarize the financial strength ratios of Aflac’s primary operating companies below. Exhibit 11. Financial Strength Ratings of Primary Companies


- A+ (OS) A+ (ON) A+American Family Life Assr Co. of New York Downgrade Affirm Affirm

9/16/2015 6/16/2016 6/22/2016Aa3 (OS) A+ (OS) A+ (ON) A+

American Family Life Assurance Co. of Columbus Affirm Downgrade Affirm Affirm9/19/2014 9/16/2015 6/16/2016 6/22/2016

Remove A+Continental American Insurance Co. (SC) 3/23/2009 Affirm

6/22/2016 Source: Moody’s, S&P, Fitch, AM Best, and Wells Fargo Securities, LLC


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Daniel Paul Amos Chairman & CEO 64 Joined Aflac in 1973 0.53Kriss Cloninger III President, Aflac Inc. 68 Joined Aflac in 1992; former CFO 0.10Paul Shelby Amos II President, Aflac 40 Joined Aflac in 2002 0.40Frederick John Crawford Executive VP & CFO 52 Joined Aflac in 2015; CFO at CNO, LNC 0.01

Source: Company data and Wells Fargo Securities, LLC Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: We are loading in capital hedge costs “above the line” in 2017 and 2018, but not in 2016, which is the

manner in which AFL will report. We are loading in 2017 and 2018 hedge costs of $289 million, pre-tax, which is within the range presented at the September 2016 Tokyo investor day.

Share repurchases of $1.4 billion, $1.5 billion and $1.5 billion for full year 2016E, 2017E, and 2018E. In Aflac Japan, 1st sector product sales decline of 15% in 2016 and growth of 1% in both 2017E and 2018E. In Aflac Japan, 3rd sector product sales growth of 2.5% in 2016 and 5% in both 2017E and 2018E. Aflac Japan benefit ratio of 60.8%, 61.4%, and 61.9% in 2016, 2017 and 2018, respectively. Aflac Japan expense ratio of 18.6%, 18.3% and 18.4% in 2016, 2017 and 2018 respectively. In Aflac U.S., sales growth 4% in 2016 and 5% in both 2017E and 2018E. New money yield of 1% for Aflac Japan and 3% for Aflac U.S. Tax rate of 34.6% for both full year 2017E and 2018E.


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Exhibit 13. Aflac (AFL) Summary Earnings Model $ Millions Except Per Share Data

Fiscal Year Ends December 31 2013 2014 2015 Q1 2016 Q2 2016 Q3 2016EQ4 2016E 2016E 2017E 2018E

OVERVIEWPretax Operating EarningsAFLAC Japan $3,628 $3,458 $3,175 $838 $839 $873 $807 $3,357 $3,395 $3,367

AFLAC U.S. 1,038 1,073 1,102 332 291 291 271 1,185 1,179 1,186

Total Insurance 4,666 4,531 4,277 1,170 1,130 1,164 1,078 4,542 4,574 4,553

Non-Insurance Interest Expense (197) (198) (146) (29) (30) (30) (30) (118) (118) (118)

Other (70) (80) (58) (32) (21) (18) (18) (89) (72) (72)

Hedge Costs 0 0 0 0 0 0 (289) (289)

Total Pretax Operating Earnings 4,399 4,253 4,073 1,109 1,079 1,116 1,031 4,335 4,095 4,074

Taxes 1,512 1,456 1,403 383 372 386 357 1,498 1,417 1,410

Tax Rate 34.4% 34.2% 34.4% 34.5% 34.5% 34.6% 34.6% 34.6% 34.6% 34.6%

Operating Earnings 2,887 2,797 2,670 726 707 730 674 2,837 2,678 2,664

Operating Earnings Per Share 6.18 6.16 6.16 1.73 1.71 1.77 1.64 6.85 6.74 6.99 % Change -6% 0% 0% 11.9% 13.5% 13.8% 5.2% 11% -1% 4%

Ending Shares Outstanding 459.4 442.4 424.4 415.2 410.1 407.0 404.1 404.1 383.1 363.1

Wtd. Avg. Diluted Shares Outstanding (Mil.) 467.4 454.0 433.2 420.9 414.3 412.3 410.4 414.5 397.1 381.0

Shares Repurchased 13.25 19.67 21.34 10.15 5.87 3.10 2.90 22.03 21.00 20.00

Dollar Amount Repurchased 799.5 1,200.0 1,300.0 600 400 211 197 1,408.6 1,480.7 1,505.2

Cost Per Share (Based on Avg.) 60.34 61.00 60.92 59.10 68.10 68.10 68.10 63.95 70.51 75.26

Dividend Per Share 1.42 1.50 1.58 0.41 0.41 0.41 0.44 1.67 1.79 1.92

Payout Ratio 23% 24% 26% 24% 24% 23% 27% 24% 27% 27%

Ann. Operating ROE (Ex. FAS 115) 20.9% 20.2% 18.5% 19.3% 18.3% 17.9% 16.3% 18.0% 15.9% 15.5%

Book Value (Excl. FAS 115) $29.59 $30.96 $34.76 $37.00 $39.32 $40.41 $41.35 $41.35 $44.58 $47.88Book Value (Incl. FAS 115) $31.82 $41.47 $41.73 $48.22 $54.98 $55.48 $56.38 $56.38 $59.75 $63.13

BV Incl. 115/BV Excl.115 108% 134% 120% 130% 140% 137% 136% 136% 134% 132%

EndingYen/Dollar ¥105.39 ¥120.55 ¥120.61 ¥112.68 ¥102.91 ¥104.00 ¥105.00 ¥105.00 ¥108.00 ¥107.00After-tax Margin 12.3% 12.5% 13.0% 13.6% 12.6% 12.6% 11.7% 12.6% 11.6% 11.2%

Pretax Margin 18.7% 19.0% 19.8% 20.7% 19.3% 19.3% 17.9% 19.3% 17.7% 17.1%

Beg. Common Equity (Ex. FAS 115) 14,037 13,594 14,070 14,751 15,363 16,126 16,446 14,751 16,712 17,078

Net Income to Common 3,158 2,951 2,534 731 548 700 644 2,623 2,558 2,544

Dividends to Common (664) (681) (684) (173) (170) (169) (181) (692) (711) (731)

Other (Buybacks, Currency Translation) (2,937) (1,794) (1,168) 53 385 (211) (197) 29 (1,481) (1,505)

Ending Com. Equity (Excl. FAS 115) 13,594 14,070 14,751 15,363 16,126 16,446 16,712 16,712 17,078 17,386

Avg Com. Equity (Excl. FAS 115) 13,815 13,832 14,410 15,057 15,744 16,286 16,579 15,731 16,895 17,232

Plus: Unrealized Gains/ (Losses) on Inv. Sec. 1,026 4,646 2,631 4,658 6,424 6,424 6,424 6,424 6,424 6,424

Ending Com. Equity (as reported) 14,620 18,716 17,382 20,021 22,550 22,870 23,136 23,136 23,503 23,810 Source: Company data and Wells Fargo Securities, LLC estimates The website links included in this publication are not maintained, controlled or operated by Wells Fargo Securities. Wells Fargo Securities does not provide the products and services on these websites and the views expressed on these websites do not necessarily represent those of Wells Fargo Securities. Please review the applicable privacy and security policies and terms and conditions for the website you are visiting. Company Description:

AFLAC Inc., based in Columbus, Georgia, sells supplemental health and life insurance marketed and administered primarily through U.S. and Japanese subsidiaries. About 75% of the company's profit comes from Japan, where the company ranks among the largest Japanese insurers. AFLAC's products help fill gaps in consumers' primary insurance coverage. Products include cancer expense insurance, care plans, supplemental general medical expense plans, and living benefit plans. AFLAC's U.S. policies are individually underwritten and marketed at worksites through independent agents.

WELLS FARGO SECURITIES, LLC Genworth Financial, Inc. EQUITY RESEARCH DEPARTMENT

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Genworth Financial, Inc. GNW: Resuming Coverage With A Market Perform Rating Summary: We are resuming coverage on Genworth with a change in analyst,

a Market Perform rating and a valuation range of $4-$6 per share. Our EPS estimates are $0.88 for 2016 and $0.93 for 2017. We recognize there would be upside to GNW shares from a potential de-stacking of statutory entities that would allow value to be realized on runoff life & annuity blocks. Still, we do not have enough visibility into the process to allow us to ascribe positive value to the life& annuity business.

Think sum-of-the-parts. Our sum-of-the-parts (SOTP) valuation assigns zero value to Genworth’s life businesses consisting of long-term care (LTC) and runoff life insurance and annuities. As it stands now, any excess capital in the life and annuity blocks is “trapped” to support long-term care, in our view.

Story turns to whether GNW will get regulatory relief to de-stack. Unlocking value in Genworth’s life and annuity businesses will require regulatory approval to de-stack Genworth. After suspending life and annuity sales and repatriating its term life book from Bermuda, the company intends to restructure its life companies through a multi-phase process that spans 2016 to 2018: (1) align substantially all of its inforce life and annuity business under Genworth Life and Annuity Insurance Co. (GLAIC) and all of its long term care (LTC) business under Genworth Life Insurance Co. (GLIC); (2) separate GLIAC and GLIC ownership structure; (3) make Genworth Life Insurance Company of New York (GLICNY) a wholly-owned subsidiary of GLIC; and (4) ultimately place GLIC and GLICNY in another part of Genworth’s organizational structure.

Putting LTC into runoff. A logical follow-up to de-stacking GLAIC from under GLIC would be for Genworth to capitalize GLIC to a certain level acceptable to regulators (probably in the 550% range), then to stop new LTC sales and essentially walk away from the LTC block until capital levels got down near company action level. Since Genworth would no longer be selling product out of GLIC, the holding company would feel no need to capitalize the unit at such a level to maintain financial strength ratings.

Potential default on holding company debt. Given the potential earnings and cash flow drag from Genworth’s long-term care business, there is a chance that the company might not have enough cash to meet its $3.2 billion of holding company debt maturities. At the end of Q2, GNW had roughly $934 million of holding company cash and liquid assets (up from $760 million at the end of Q1 2016), of which $80 million were restricted.

Q3 Preview. We are forecasting Q3 2016 EPS of $0.22 versus consensus of $0.22. We expect to see some modest quarterly true-ups in LTC disabled reserves as well as sequentially weaker U.S. mortgage insurance results due to seasonality.

Valuation Range: $4.00 to $6.00 from NE to NE Our valuation range is based on our SOTP analysis, which ascribes specific values to U.S. MI ($4), Canada MI ($3), Australia MI ($1), Corp and Other ($2), and net debt (-$6). Risks to achieving our range include rising home mortgage delinquencies, liquidity constraints, credit losses, and the need to raise capital. Investment Thesis: We rate GNW shares Market Perform. Despite possible upside related to a potential de-stacking of statutory entities, we do not find the risk-reward compelling enough to step in at current levels given potential downside from long-term care.

Market Perform / V


Market Weight


2015A 2016E 2017E EPS Curr. Prior Curr. Prior Q1 (Mar.) $0.31 $0.21 A NC $0.24 NE Q2 (June) 0.24 0.25 A NE 0.25 NE Q3 (Sep.) 0.13 0.22 NE 0.22 NE Q4 (Dec.) (0.17) 0.21 NE 0.22 NE FY $0.51 $0.88 NE $0.93 NE CY $0.51 $0.88 $0.93 FY P/EPS 9.7x 5.6x 5.3x Rev.(MM) $8,643 $8,349 $8,753 Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful V = Volatile, = Company is on the Priority Stock List

operating EPS

Ticker GNW

Price (09/22/2016) $4.95 52-Week Range: $1-6 Shares Outstanding: (MM) 498.5 Market Cap.: (MM) $2,467.6 S&P 500: 2,178.01 Avg. Daily Vol.: 9,219,170 Dividend/Yield: $0.00/0.0% LT Debt: (MM) $4,191.0 LT Debt/Total Cap.: 27.0% ROE: 4.0% 3-5 Yr. Est. Growth Rate: 5.0% CY 2016 Est. P/EPS-to-Growth: 1.1x Last Reporting Date: 08/02/2016


Sean Dargan, Senior Analyst(212) 214-1416 sean .dargan@wellsfargo .com

Kenneth Hung, CFA, ASA, Associate Analyst(212) 214-8023 kenneth .hung@wellsfargo .com


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Investment Thesis We recognize there would be upside to GNW shares from a potential de-stacking of statutory entities that will allow value to be realized on runoff life & annuity blocks. However, we do not find the risk-reward compelling enough to step in at around $5 given potential downside from LTC. Valuation Our valuation range is based on our SOTP analysis, which ascribes specific values to U.S. MI ($4 per share), Canada MI ($3 per share), Australia MI ($1 per share), Corp and Other ($2 per share), and backs out net debt (-$6). With limited visibility into getting excess capital from the life & annuity lines of business up to the holding company without getting trapped in LTC entity Genworth Life Insurance Company, we ascribe zero value to the life (consisting of life, annuity and long-term care business). Risks to achieving our range include rising home mortgage delinquencies, liquidity constraints, credit losses, and the need to raise capital. Exhibit 1. Sum-Of-The-Parts Analysis ($ in millions, except per share data)

Segments Allocated Equity Multiple ValuePer

SharePro Forma GLIC (stat capital) 2,630 0.00x - - U.S. Mortgage Insurance 1,975 1.10x 2,173 4.35Canada Mortgage Insurance* 1,691 0.82x 1,388 2.78Australia Mortgage Insurance* 578 1.18x 679 1.36Corp and Other (assets less liab ex net debt) 1,294 0.85x 1,100 2.20

Net Debt (pro forma)** (2,899) (2,899) (5.81) Total 5,269 0.46x 2,440 4.89 * Market value in USD, excludes noncontrolling interest **Assumes: Corporate debt of -$3.8bn+holdco cash of $760mn+cash tax payment of $128mn Source: FactSet, Company data, and Wells Fargo Securities, LLC estimates Exhibit 2. GNW Price-To-Book (ex AOCI) Multiples Exhibit 3. GNW Price-To-Earnings Multiples

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Source: FactSet, Company data, and Wells Fargo Securities, LLC


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Investment Opportunities De-stacking of life companies. Unlocking value in Genworth’s life and annuity businesses will require regulatory approval to de-stack the company. Genworth suspended traditional life and fixed annuity sales in Q1 and repatriated the company’s term life block from Bermuda in Q2 2016. The company has announced it intends to restructure its life companies through a multi-phase process that spans 2016 to 2018: (1) align substantially all of its inforce life and annuity business under Genworth Life and Annuity Insurance Co. (GLAIC) and all of its long term care (LTC) business under Genworth Life Insurance Co. (GLIC); (2) separate GLIAC and GLIC ownership structure; (3) make Genworth Life Insurance Company of New York (GLICNY) a wholly-owned subsidiary of GLIC; and (4) ultimately place GLIC and GLICNY in another part of Genworth’s organizational structure. Putting LTC into runoff. A logical follow-up to de-stacking GLAIC from under GLIC would be for Genworth to then capitalize GLIC to a certain level acceptable to regulators (probably in the 550% range), then to stop new LTC sales and essentially walk away from the LTC block until capital levels got down near company action level. Since Genworth would no longer be selling product out of GLIC, the holding company would feel no need to capitalize the unit at such a level to maintain financial strength ratings. Exhibit 4. GNW’s Global Organizational Chart

Genworth Life and Annuity Insurance

Company (GLAIC; VA) 54-0283385

GNW wants to make GLAIC sister co. with GLIC.

Genworth Financial, Inc. (DE) FBN: 80-0873306

Genworth Holdings, Inc. (DE) 33-1073076

Genworth Life Insurance Company (GLIC; DE)

91-6027719

Genworth Life Insurance Company of New York

(GLICNY; NY) 22-2882416

Source: Company data, SNL and Wells Fargo Securities, LLC SOURCE: SNL FINANCIAL LC. CONTAINS COPYRIGHTED AND TRADE SECRET MATERIAL DISTRIBUTED UNDER LICENSE FROM SNL. FOR RECIPIENT’S INTERNAL USE ONLY A less-competitive mortgage insurance market. Following the recent announcement by Arch Capital of its plans to buy mortgage insurer from AIG, we think the US mortgage insurance market is rationalizing. Although the credit quality of insured borrowers has been historically high, the size of the mortgage origination market is smaller than many thought it would be five years ago, and with seven entrants recurring fears of price competition have held back trading multiples among listed mortgage insurers. With one of the two largest competitors being taken out by an operator many feel is more disciplined around pricing, we view US Mortgage Insurance (USMI) as Genworth’s most valuable business line. Investment Risks Potential default on holding company debt. Given the potential earnings and cash flow drag from Genworth’s long-term care business, there is a chance that the company might not have enough cash to meet its $3.2 billion of holding company debt maturities. At the end of Q2, GNW had roughly $934 million of holding company cash and liquid assets, of which $80 million were restricted. In Q2 2016, the company received $88 million from Australia MI and Canada MI, $128 million taxes primarily from tax sharing agreements related to realized gains on derivative positions, $39 million holding company net other items include expense reimbursements and other miscellaneous items, and $18 million additional pledged cash for cleared derivative trades.


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Exhibit 5. GNW has $3.2 billion of debt maturing between now and 2021

0

200

400

600

800

1,000

1,200

2018 2020 2021 2023 2024

$ m

illio

ns

Senior Debt Maturing

Source: Company data, SNL and Wells Fargo Securities, LLC Exhibit 6. Holding Company Cash & Liquid Assets, 6/30/2016 ($ in millions)

$760$88

$128 $(63) $39 $(18) $934

3/31/2016 Op. Co.Dividends

Taxes Paid BySubsidiaries

InterestExpense

Hold. Co.Net Other

Items

Pledged Cash 6/30/2016

Source: Company data and Wells Fargo Securities, LLC Deterioration of LTC reserve margin. Genworth’s legacy blocks of long-term care business continue to be a potential drag on earnings and free cash flow. To reflect lower interest rates and updated termination, utilization, morbidity and mortality assumptions, the company took an after-tax GAAP charge of $478 million in Q4 2014 related to the LTC active life margin review for the blocks of business acquired before 1996. The company’s New York subsidiary also had an incremental negative margin of $195 million in that quarter, of which the majority is to be recognized over the next several years. While GNW continues to obtain regulatory approval for rate increases for its in-force blocks, if interest rates stay lower for longer, we think it is just a matter of time (perhaps Q4 2017/2018) for the company to take another large charge to boost its LTC reserves. Housing cycle downturn in Australia and/or Canada. The recent loss ratio for Genworth’s Australia MI business has been rising in part due to seasonality and new delinquencies along with incremental pressure from the commodity-driven regions of Queensland and Western Australia. The flow market in Australia has softened as regulators continue to focus on the lending environment, which has impacted lenders' risk appetite. For the next several years, we think top line growth will be challenged in Australia. To cool off the heated market, regulators in Australia have tried to slow lending growth through some macro prudential means. The same thing happened in Canada over the last several years, which has allowed the country to have a soft landing for its own heated housing market. To us, Canada still has a decent MI market and top-line growth opportunities. We expect GNW to continue to grow over the next few years in the country and take share opportunities in the marketplace where presented.


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Company Overview Genworth was founded in 1871 as The Life Insurance Company of Virginia. In 1986, Life of Virginia was acquired by Combined Insurance, which became Aon plc in 1987. In 1996, Life of Virginia was sold to GE Capital. Genworth Holdings (formerly known as Genworth Financial, Inc.), which was incorporated in Delaware in 2003 and formed out of various insurance businesses of GE, went public in May 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware in December, 2012, in connection with the reorganization, and was renamed Genworth Financial, Inc. upon the completion of the reorganization. Genworth operates its business through five operating segments: U.S. Mortgage Insurance, Canada Mortgage Insurance, Australia Mortgage Insurance, U.S. Life Insurance, and Runoff. In addition to its five operating business segments, the company also has Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions, and the results of other businesses that are managed outside of its operating segments, including certain smaller international mortgage insurance businesses and discontinued operations. Exhibit 7. Operating Earnings By Segment, 2016 Q2

U.S. Mortgage Insurance ,

34.9%

Canada Mortgage

Insurance , 21.7%

Australia Mortgage

Insurance , 8.6%

U.S. Life , 31.4%

Runoff, 3.4%

Note: Excluded Corporate and Other. Source: Company data and Wells Fargo Securities, LLC


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Summary Business Unit Discussion U.S. Mortgage Insurance. In the United States, the company offers mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (flow mortgage insurance). In addition, Genworth also selectively provides mortgage insurance on a bulk basis (bulk mortgage insurance) with essentially all of its bulk writings being prime-based. Exhibit 8. U.S. Mortgage Insurance After-Tax Operating Income And Margin ($ in millions)

Exhibit 9. Canada Mortgage Insurance After-Tax Operating Income And Margin ($ in millions)

-$513 -$138$37

$91

$179$122

-76.2%

-21.6%

6.0% 14.2% 27.0% 34.7%

-100.0%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

-$600

-$500

-$400

-$300

-$200

-$100

$0

$100

$200

$300

2011 2012 2013 2014 2015 H1 2016

$159 $234 $170 $170 $152 $71

36.6%

56.1%

44.4%46.2% 45.3%

45.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

$0

$50

$100

$150

$200

$250

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Canada Mortgage Insurance. Genworth offers flow mortgage insurance and also provides bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada. Australia Mortgage Insurance. In Australia, the company offers flow mortgage insurance and selectively provides bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Exhibit 10. Australia Mortgage Insurance After-Tax Operating Income And Margin ($ in millions)

Exhibit 11. LTC Adjusted After-Tax Operating Income And Gross Benefits Ratio ($ in millions)

$196 $142 $228 $200 $102 $19

33.9%

25.0%

40.9% 47.9%

39.7% 38.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

$0

$50

$100

$150

$200

$250

2011 2012 2013 2014 2015 H1 2016

$99 $101 $129

-$815

$29 $71

115% 120% 120%

182%

130%

82%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

-$1,000

-$800

-$600

-$400

-$200

$0

$200

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC U.S. Life Insurance. Genworth offers long-term care (LTC) insurance products as well as service traditional life insurance and fixed annuity products in the United States. The company is in the process of restructuring its business and has placed the life and annuity books into runoff since Q1 2016. Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold but the company continues to service its existing blocks of business. Its non-strategic products primarily include variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes and guaranteed investment contracts.


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Exhibit 12. Runoff After-Tax Operating Income ($ in millions)

$27

$46

$66

$48

$27

$10

$0

$10

$20

$30

$40

$50

$60

$70

2011 2012 2013 2014 2015 H1 2016

AD AT

Source: Company data and Wells Fargo Securities, LLC Investment Portfolio Genworth internally manages certain asset classes for its domestic insurance operations, including public government, municipal and corporate securities, structured securities, commercial mortgage loans, privately placed debt securities and derivatives. The company utilizes external asset managers for most of its international portfolios and select asset classes. Genworth manages its assets to meet diversification, credit quality, yield, and liquidity requirements of the company’s policy and contract liabilities by investing primarily in fixed maturity securities, including government, municipal and corporate bonds and mortgage-backed and other asset-backed securities. The company also holds mortgage loans on commercial real estate and other invested assets, which include derivatives, trading securities, limited partnerships and short-term investments. Exhibit 13. Investment Portfolio By Asset Class, 6/30/2016

51.31%

14.61%

8.77%

8.07%

4.45%

3.54%

2.72%

2.48% 2.26% 0.57% 0.44% 0.35% 0.23% 0.18%Securities Owned: CorporateDebt



Mortgage Loans




Other Investments

Policy Loans



76

Capital Profile We summarize the financial strength ratios of Genworth’s primary companies below. Exhibit 14. Financial Strength Ratings of Primary Companies

AM Best S&P Moody's

Genworth Life Insurance Company B++ BB Ba1Genworth Life and Annuity Insurance Company B++ BB Baa2Genworth Life Insurance Company of New York B++ BB Ba1Genworth Mortgage Insurance Corporation B++ BB+ Ba1Genworth Financial Mortgage Insurance Pty Limited (Australia)- A+ A3Genworth Financial Mortgage Insurance Company Canada - A+ -

Source: Moody’s, S&P, AM Best, and Wells Fargo Securities, LLC Management Below we provide a background of each key member of management, along with current stock ownership. Exhibit 15. Key Management


Thomas Joseph "Tom" McInerney President & CEO 59 Joined in 2013; previously

ING, Aetna 0.03

Kelly Lee Groh Executive VP & CFO 47 Joined GE in 1996; Was Principal Accounting Officer 0.01

Kevin Douglas Schneider Executive VP & COO 54 Joined GE in 1992 0.00

Source: Company data and Wells Fargo Securities, LLC Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: No share repurchase for full year 2016E, 2017E, and 2018E. Consolidated operating EPS annual growth of 5.3% in 2017E and -3.7% in 2018E U.S. MI after-tax operating income growth of 18.6% in 2017E and 4.9% in 2018E Canada MI after-tax operating income growth of -8.0% in 2017E and -3.0% in 2018E Australia MI after-tax operating income growth of -4.0% in 2017E and -0.7% in 2018E U.S. Life after-tax operating income growth of -26.5% in 2017E and -7.3% in 2018E Runoff after-tax operating income growth of -22.7% in 2017E and -27.4% in 2018E Corporate and Other operating losses of $179 million in 2017E and $179 million in 2018E Annualized equity market return of 8% Tax rate of 31.7%% for full year 2017E and 31.6% for 2018E.


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Exhibit 16. Genworth (GNW) Summary Earnings Model $ Millions Except Per Share Data


OVERVIEWOperating Earnings by SegmentUS Mortgage Insurance 37 91 179 61 61 53 51 225 267 280 Canada Mortgage Insurance 170 170 152 33 38 31 32 133 123 119 Australia Mortgage Insurance 228 200 102 19 15 21 21 76 72 72 Other International Mortgage Insurance (37) (25) - - - - - - - -

Life Insurance 173 75 (80) 31 31 24 19 105 91 88

Long Term Care 129 (815) 29 34 37 2 3 76 2 1

Fixed Annuities 92 100 94 26 (13) 18 18 49 76 68

Total US Life 394 (641) 43 91 55 44 40 230 169 157 Runoff Segment 66 48 27 4 6 6 6 22 17 12

Corporate & Other (266) (241) (248) (105) (52) (45) (43) (246) (179) (179)

Total Corporate and Runoff (176) (193) (221) (101) (46) (39) (38) (224) (162) (167) Operating Income 616 (398) 255 103 123 109 105 441 470 462 % Change 52.9% -164.5% -164.2% -33.1% 3.4% 71.0% -228.3% 72.8% 6.6% -1.7%

Realized Gains/Losses and other adjustments (11) (7) (19) (13) 39 - - 26 - -

Net Income Available to GNW Shareholders 560 (1,244) (615) 53 172 109 105 440 470 462

Operating EPS $1.24 ($0.80) $0.51 $0.21 $0.25 $0.22 $0.21 $0.88 $0.93 $0.89% Change 51.5% -164.4% -164.5% -33.2% 3.1% 70.0% -223.0% 71.9% 5.3% -3.7%

Operating ROE, ex AOCI 5.3% -3.4% 2.5% 4.2% 4.9% 4.3% 4.1% 4.4% 4.5% 4.2%Share Outstanding - Diluted (average) 499 500 497 499 500 500 500 500 507 517

Shares repurchased - - - - - - - - - -

Avg share price for repurchase - - - - - - - - - -

Dollar amount of share repurchases - - - - - - - - - -

Book Value Per Share $29.18 $30.04 $25.76 $28.19 $30.37 $30.59 $30.80 $30.80 $31.74 $32.67

Book Value Per Share, ex AOCI $24.04 $21.09 $19.71 $19.80 $20.15 $20.37 $20.58 $20.58 $21.53 $22.45Balance Sheet ItemsTotal Assets 108,045 111,358 106,431 107,173 108,206 108,836 109,460 109,460 112,242 114,977

xEquity 6.3x 6.1x 6.7x 6.2x 5.9x 5.9x 5.9x 5.9x 5.9x 5.9x

Total Debt 5,261 4,739 4,670 4,332 4,191 4,191 4,191 4,191 4,191 4,191

Total Liabilities 92,385 94,561 91,794 91,200 91,197 91,721 92,239 92,239 94,552 96,825 Shareholders' Equity

AOCI 2,542 4,446 3,010 4,185 5,088 5,088 5,088 5,088 5,088 5,088

Equity, ex AOCI 11,891 10,477 9,814 9,870 10,045 10,151 10,257 10,257 10,727 11,188

Total Stockholder's Equity 14,433 14,923 12,824 14,055 15,133 15,239 15,345 15,345 15,815 16,276

Minority Interest 1,227 1,874 1,813 1,918 1,876 1,876 1,876 1,876 1,876 1,876

Total Equity 15,660 16,797 14,637 15,973 17,009 17,115 17,221 17,221 17,691 18,152 Debt to Capital 26.3% 23.7% 26.3% 23.1% 21.7% 21.6% 21.5% 21.5% 20.9% 20.5%

CONSOLIDATED OPERATING INCOME STATEMENTPremiums 5,148 5,431 4,598 794 1,127 1,169 1,195 4,284 4,818 4,976

Net Investment Income 3,262 3,243 3,139 789 779 779 769 3,116 3,093 3,071

Policy Fee / Other Income 1,021 914 906 220 301 213 214 948 841 820

Total Operating Revenues 9,431 9,588 8,643 1,803 2,207 2,160 2,179 8,349 8,753 8,867 Benefits 4,895 6,620 5,160 860 1,193 1,293 1,318 4,664 5,302 5,478

Interest Credited 738 737 720 177 173 176 175 701 660 631

Operating Expenses 1,659 1,600 1,335 394 327 281 285 1,286 1,131 1,122

DAC / Intangible Amortization 568 511 966 99 112 98 98 408 391 386

Interest Expense 493 455 419 105 80 93 93 371 374 374

Total Expenses 8,353 9,923 8,600 1,635 1,885 1,941 1,969 7,430 7,858 7,991 Pre-Tax Operating Income 1,078 (335) 43 168 322 219 210 919 895 877 Tax 341 (283) (91) 24 152 72 66 314 284 277

Minority interest (154) (140) 120 (41) (47) (38) (38) (164) (141) (141)

Operating Income To Genworth 616 (398) 255 103 123 109 105 441 470 462 Source: Company data and Wells Fargo Securities, LLC estimates


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Company Description: Genworth Financial, headquartered in Richmond, Virginia, is an insurance holding company formed from a partial spin off from parent General Electric in May 2004. The company has a presence in more than 25 countries through its three primary divisions: U.S. Life Insurance, Global Mortgage Insurance, and Corporate and Other.

WELLS FARGO SECURITIES, LLC Lincoln National Corp. EQUITY RESEARCH DEPARTMENT

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Lincoln National Corp. LNC: Resuming Coverage With A Market Perform Rating Summary. We are resuming coverage with a change in analyst of Lincoln

National, with a Market Perform rating and a $46-50 valuation range. Our 2016 EPS estimate is $6.10 and our 2017 EPS estimate $6.75. We view the company as a strong domestic franchise characterized by consistent return of capital. In the near term we think the risk/reward of the stock is balanced with uncertainty related to the negative impacts of the DOL’s fiduciary proposal, as well as the company’s earnings sensitivity to capital market risks.

Uncertainty related to the impacts of DOL’s fiduciary proposal. The Department of Labor’s (DOL) fiduciary regulations are expected to impact sales of annuities that are funded by IRAs or IRA rollovers. In 2015, roughly 38% of Lincoln’s variable annuity and fixed index annuity sales were qualified sales. The company plans to continue to focus on non-qualified sales, but intends to use the Best Interest Contract exemption to provide both fee-based and commission products to qualified accounts. As Lincoln transitions and pivots its annuity business, we expect to see some drag on the company’s annuity earnings.

Consistent EPS growth and ROE expansion. Since 2009, Lincoln has continued to grow its operating EPS at a CAGR of 12%, in part driven by steady revenue growth (6% CAGR) and controlled expenses (down 110 bps). Book value per share growth was also strong at 7% CAGR. Operating ROE, ex. notable items, pushed past 12% in 2015 and expanded around 260 bps over the last 6 years. Despite earnings headwind of 2-3% from continued low interest rates, LNC targets annual EPS growth of 8-10%, including: +4-5% from net flows/premiums, +1-2% from margin improvement in Group Protection, +2-4% from equity market growth (assuming 6-8% total return), and +2-3% from buybacks.

Steady return of capital. The company’s capital management is funded by free cash flow, which is expected to be 50-55% of operating earnings over the long term. Since 2011, the company has returned capital in excess of $4 billion, including over $3.5 billion in share repurchases, and around $0.7 billion in dividends. Meanwhile, Lincoln’s maintained strong risk-based capital ratio (487% at year-end 2015) during active capital management execution. Given LNC’s current valuation, we expect buybacks will remain the primary use of capital.

Q3 preview. We are forecasting EPS of $1.61 versus consensus of $1.61. Our Q3 EPS estimate reflects the impact related to a stronger-than-expected equity market performance and lower interest rates in the quarter. In Q3, historically LNC performs a review of actuarial assumptions. Based on the experience of MET and PRU, we think it is likely charges are coming but the magnitude of these could be much smaller as LNC could also record a sizeable positive unlocking (roughly $180 million at year-end 2015) related to the higher levels in equities.

Valuation Range: $46.00 to $50.00 from NE to NE Our valuation range is based on a 0.8x multiple on our Q3 2017E BVPS ex. AOCI of $62, in accordance with our valuation model and our outlook for future investment losses. Risks to our valuation range include investment spread compression, falling investment income, weak equity markets, rising capital needs, and credit losses. Investment Thesis: We rate the shares Market Perform. We think the risk/reward of the stock is balanced in the near term largely due to the uncertainty related to the negative impacts of the DOL's fiduciary proposal.

Market Perform / V


Market Weight



Operating EPS FY 2015 EPS impacted by timing of share repurchase

Ticker LNC







80

Investment Thesis We rate the shares Market Perform. We view the company as a strong domestic franchise characterized with consistent EPS growth, ROE expansion, and return of capital. In the near term we think the risk/reward of the stock is balanced with uncertainty related to the negative impacts of the DOL’s fiduciary proposal, as well as the company’s earnings sensitivity to capital market risks. Valuation Our $46-$50 valuation range is based on a 0.8x multiple on our estimate of Q3 2017E BVPS ex. AOCI of $62.06. Our multiple sits more than one standard deviation below the three-year average P/BV multiple but is within the range the stock has traded with during the last year as interest rates took a leg down. Risks to our valuation range include investment spread compression, falling investment income, weak equity markets, rising capital needs, and credit losses. Exhibit 1. LNC Price-To-Book (ex AOCI) Multiple Exhibit 2. LNC Price-To-Earnings Multiple

0.86x

Average, 1.03x

0.3x

0.4x

0.5x

0.6x

0.7x

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

Se

p-13 Dec

-13 Mar

-14

Jun

-14

Se

p-14 Dec

-14 Mar

-15

Jun

-15

Se

p-15 Dec

-15 Mar

-16

Jun

-16

Se

p-16

Pric

e to

Boo

k (e

x AO

CI)

LNC

LNC Average

7.03x

Average, 8.27x

3.5x

4.5x

5.5x

6.5x

7.5x

8.5x

9.5x

10.5x

Se

p-13

Dec

-13

Mar

-14

Jun

-14

Se

p-14

Dec

-14

Mar

-15

Jun

-15

Se

p-15

Dec

-15

Mar

-16

Jun

-16

Pric

e to

NTM

Ear

ning

s

LNC

LNC Average

Source for both charts: Company data, FactSet and Wells Fargo Securities, LLC estimates Investment Opportunities Consistent EPS growth and ROE expansion. Since 2009, Lincoln has continued to grow its operating EPS at a CAGR of 12%, in part driven by steady revenue growth (6% CAGR) and controlled expenses (down 110 bps). Book value per share growth was also strong at 7% CAGR. Operating ROE, ex. notable items, pushed past 12% in 2015 and expanded around 260 bps over the last 6 years. Despite earnings headwind of 2-3% from continued low interest rates, LNC targets annual EPS growth of 8-10%, including: +4-5% from net flows/premiums, +1-2% from margin improvement in Group Protection, +2-4% from equity market growth (assuming 6-8% total return), and +2-3% from buybacks.


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Exhibit 3. Annual EPS Growth Target Of 8-10%

Net Flows /Premiums

Group MarginImprovement

ExpenseEfficiency

Equity MarketGrowth

SpreadCompression

Buybacks Targeted EPSAppreciation

+4-5%

+1-2%+0-1%

+2-4%

(2-3)%

+2-3%

Organic Earnings Capital Markets Capital Management

Target ~8-10%

Source: Company data and Wells Fargo Securities, LLC Steady return of capital. The company’s capital management is funded by free cash flow, which is expected to be 50-55% of operating earnings over the long term. Since 2011, the company has returned capital in excess of $4 billion, including over $3.5 billion in share repurchases, and around $0.7 billion in dividends. Meanwhile, Lincoln’s maintained strong risk-based capital ratio (487% at year-end 2015) during active capital management execution. Given LNC’s current valuation, we expect buybacks will remain the primary use of capital in the near term. Exhibit 4. Capital Generation, 2011 – Q2 2016

$3.5$1.3

$0.7

$0.3

$ in billions

Share repurchases

Retained in life company

Dividends

Deleveraging



82

Investment Risks Uncertainty related to the impacts of DOL’s fiduciary proposal. The Department of Labor’s fiduciary regulations are expected to have a large impact on sales of annuities that are funded by IRAs or IRA rollovers. According to LIMRA, $100 billion in variable and indexed annuity sales will be subjected to the DOL rule’s Best Interest Contract exemption. In addition, guaranteed lifetime benefits rider sales could also decline significantly. Pre-retirees and retirees invest nearly $72 billion annually in annuities (out of the $100 billion affected sales) with guaranteed lifetime withdrawal or income benefits riders. In 2015, roughly 38% of Lincoln’s $12.7 billion variable annuity (VA) and fixed index annuity (FIA) sales were qualified sales. The company plans to continue to focus on non-qualified sales, but intends to use the Best Interest Contract (BIC) exemption to provide both fee-based and commission products to qualified accounts. Exhibit 5. Department Of Labor Fiduciary Standards

Key Highlights - Commissions acceptable and may be in clients best interest - Commissions and fees held to the same standard - Lifetime income and guarantees recognized - FIA and group variable annuities included in final rule - Grandfather provision through 4/10/2017 - Full implementation by 1/1/2018

Distribution partners' reactions - Most intend to use BIC - May need to rationalize product menu and partners - Private right of action a concern

Lincoln's position - intend to use BIC - Hold commissions and fees to same standard - Distinguish lifetime income from traditional investments

Source: Company data and Wells Fargo Securities, LLC As Lincoln transitions and pivots its annuity business, we expect to see some drag on the company’s annuity earnings. Still, the longer term impact on LNC is unclear to us and there are other additional expenses related to the fiduciary regulations including compliance costs. Capital market risks. Lincoln’s businesses are susceptible to capital markets risks including interest rate risks and equity risks. Continued low interest rates could negatively affect the company’s profitability in spread products, including fixed annuities and universal life (UL) such as indexed universal life (IUL) and linked-benefit UL. In addition, low rates increase the cost of providing variable annuity living benefit guarantees, which in turn negatively affect the company’s variable annuity profitability. Lowering interest crediting rates helps to mitigate the effect of spread compression, but LNC’s spreads could still decrease as many of the company’s contracts have guaranteed minimum interest or crediting rates. As of year-end 2015, 40% of Lincoln’s annuities business, 93% of its retirement plan services business and 96% of its life insurance business with guaranteed minimum interest or crediting rates were at their guaranteed minimums. Volatility in equity markets may also significantly affect the company’s business and profitability. The fee income that Lincoln earns on variable annuities and VUL insurance policies is based primarily upon account values. A weakening of the equity markets results in lower fee income and may have a material adverse effect on the company’s results of operations and capital resources. A decrease in the equity markets, as well as worse than expected policyholder assumptions, may result in higher net amortized costs associated with deferred acquisition costs (DAC), deferred sales inducements (DSI), value of business acquired (VOBA), deferred front-end loads (DFEL) and changes in future contract benefits, and may have a material adverse effect on the company’s results of operations and capital resources. Due to much stronger than expected equity performance in the last couple of years, if the company had unlocked its reversion to the mean assumption in the corridor as of year-end 2015, LNC would have recorded favorable unlocking of roughly $145 million, pre-tax, for the Annuities segment, roughly $20 million, pre-tax, for the Retirement Plan Services segment and around $15 million, pre-tax , for the Life Insurance segment.


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Increases in reserves would result in a charge to the company’s earnings in the quarter in which the increase occurs. Therefore, Lincoln maintains a customized dynamic hedge program that is designed to mitigate the risks associated with income volatility around the change in reserves on guaranteed benefits. The cost of hedging these guaranteed benefits have increased in the last couple of years due to an increase in market volatility. In addition, there could also be breakage in hedging due to: (1) the time lag between changes in their values and corresponding changes in the hedge positions, (2) high levels of volatility in the equity markets and derivatives markets, (3) extreme swings in interest rates, (4) contract holder behavior different than expected, (5) a strategic decision to adjust the hedging strategy in reaction to extreme market conditions or inconsistencies between economic and statutory reserving guidelines, and (6) divergence between the performance of the underlying funds and hedging indices. Attempts to mitigate the impact of reserving guidelines may fail resulting in an adverse effect on LNC’s financial position. Regulation XXX requires insurers to set aside additional statutory reserves for life insurance policies with secondary guarantees. AG38 clarifies the application of XXX to certain UL policies with secondary guarantees. The application of both XXX and AG38 are open to interpretation. If state regulators disagree with LNC’s interpretation, they could require the company to fund reserves out of its capital position. Company Overview Lincoln National Corporation traces its origin to Lincoln National Life Insurance Company, which was founded in 1905 in Fort Wayne, Indiana. The company now sells a wide range of wealth protection, accumulation and retirement income products and solutions through multiple subsidiary companies. Lincoln maintains its principal executive offices in Radnor, Pennsylvania. The company provides products and services and reports results through four segments: Annuities, Retirement Plan Services, Life Insurance, and Group Protection. Exhibit 6. Operating Earnings (Ex. Corporate) By Segment, 2015

Annuities, 64.2%

Retirement Plan Services,

9.0%

Life Insurance, 24.0%

Group Protection,

2.8%

Note: Life insurance earnings were lower in 2015 due to adverse mortality. Source: Company data and Wells Fargo Securities, LLC Summary Business Unit Discussion Annuities. The company’s Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering variable and fixed (including indexed) annuities. For variable annuities, majority of the revenue are generated from mortality and expense assessments and administrative fees on variable annuity accounts to cover insurance and administrative expenses. LNC also receives premiums on guaranteed benefit riders with certain of its variable annuity products, such as a guaranteed death benefit, a guaranteed withdrawal benefit, a guaranteed income benefit, and a combination of such benefits. For fixed annuities, the company generates spread income from offering single and flexible premium fixed deferred annuities, including fixed indexed annuities.


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By our estimate, every $1 billion less in VA or FIA sales for Lincoln would translate into an annual drag of roughly $0.03 in EPS, of which $0.02 could be mitigated by an additional $50 million of share repurchase from freed-up capital (assuming a capital requirement of around 5%). In other words, if Lincoln had stopped selling VA and FIA to qualified accounts (roughly $4.8 billion in sales) in 2015, the net EPS impact could have been limited to around $0.05 per share on an annual basis. In addition, the actual decline in qualified VA and FIA sales could be smaller as some distribution organizations already are comfortable with selling commissioned products under the regulations, and several of Lincoln’s distribution partners have asked the company to emphasize its fee-based products and put them into their distribution system. Exhibit 7. Annuities Segment Operating Earnings And Return On Assets ($ in millions, after-tax)

Exhibit 8. Retirement Plan Services Segment Operating Earnings And Net Pretax Margin ($ in millions, after-tax)

$573 $596

$751

$925$996

$453

0.70%

0.60%

0.7%

0.80% 0.80%0.74%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

$0

$200

$400

$600

$800

$1,000

$1,200

2011 2012 2013 2014 2015 H1 2016

$162 $130 $141 $160 $140 $62

15.9%

12.7% 13.2%

14.7%

12.7%

11.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Retirement Plan Services. The Retirement Plan Services segment provides employers with retirement plan products and services, primarily in the defined contribution retirement plan marketplace. In addition to its core focus on employer-sponsored defined contribution plans, Lincoln also serves the defined benefit plan and individual retirement account (IRA) markets. The company provides a variety of plan investment vehicles, including individual and group variable annuities, group fixed annuities and mutual fund-based programs. LNC also offers a broad array of plan services including plan recordkeeping, compliance testing, participant education and trust and custodial services through its affiliated trust company. Life Insurance. The Life Insurance segment focuses on the creation and protection of wealth for its clients by providing life insurance products, including term insurance, both single and survivorship versions of universal life (UL), variable universal life (VUL) and indexed universal life (IUL) products, a linked-benefit product (which is UL with riders providing for long-term care costs) and a critical illness rider, which can be attached to UL, VUL or IUL policies. Some of LNC’s products also include secondary guarantees. Exhibit 9. Life Insurance Segment Operating Earnings And Return On Equity ($ in millions, after-tax)

Exhibit 10. Group Protection Segment Operating Earnings And Return On Equity ($ in millions, after-tax)

$568 $580 $544 $611 $371 $195

7.3%

10.0%8.9%

10.0%

5.8% 6.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

$0

$100

$200

$300

$400

$500

$600

$700

2011 2012 2013 2014 2015 H1 2016

$97 $72 $70 $23 $43 $20

8.9%

7.6%

6.5%

1.9%

3.5%3.4%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%

$0

$20

$40

$60

$80

$100

$120

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Group Protection. The Group Protection segment offers group non-medical insurance products, principally term life, disability and dental, to the employer marketplace through various forms of employee-paid and employer-paid plans. While Lincoln sells to employer groups of all sizes, its target market is to employers with at least 100 employees and fewer than 5,000 employees.


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Investment Portfolio The company’s investment strategy is to balance the need for current income with prudent risk management, with an emphasis on generating sufficient current income to meet its obligations. Investments by Lincoln’s insurance subsidiaries must comply with the insurance laws and regulations of the states of domicile. Derivatives are also used primarily for hedging purposes and, to a lesser extent, income generation. Hedging strategies are employed for a number of reasons including: (1) hedging certain portions of the company’s exposure to changes in liabilities related to guarantee death and living benefits in variable annuities, (2) interest rate fluctuations, (3) the widening of bond yield spreads over comparable maturity U.S. government obligations and credit, (4) foreign exchange, and (5) equity risks. Income generation strategies include credit default swaps through replication of synthetic asset transactions. These derivatives synthetically create exposure in the general account to corporate debt, similar to investing in the credit markets. Exhibit 11. Investment Portfolio By Asset Class, 6/30/2016

69.52%

8.07%

5.00%

4.35%

3.59%

2.98% 2.19%

2.10% 1.08%0.46%

0.40% 0.24% 0.02%Securities Owned: CorporateDebt

Mortgage Loans




Other Investments

Policy Loans

Securities Owned: OtherInvestments

Investment in Partnerships

Source: Company data and Wells Fargo Securities, LLC Capital Profile We summarize the financial strength ratios of Lincoln’s primary companies below. Exhibit 12. Financial Strength Ratings of Primary Companies


First Penn-Pacific Life Insurance Co.

Lincoln Life & Annuity Co. of New York

Lincoln National Life Insurance Co. A+Affirm12/8/2015

A1 (OS)Affirm6/28/2016

A- (OS)Downgrade11/11/201

A+ (OS)Affirm1/15/2016

AAffirm12/8/2015


AA- (OS)Affirm6/15/2009


A+Affirm12/8/2015






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Dennis Robert Glass President & CEO 66 Was COO of LNC; joined Jefferson Pilot in 1993 0.26

Randal Jay "Randy" Freitag Executive VP & CFO 53 Was CRO of LNC; joined Jefferson Pilot in 1995 0.04

Source: Company data and Wells Fargo Securities, LLC Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: Share repurchases of $825 million, $600 million and $600 million for full year 2016E, 2017E, and 2018E. Consolidated operating EPS annual growth of 10.6% in 2017E and 7.5% in 2018E. Annuities pretax operating earnings growth of 2.6% in 2017E and -3.9% in 2018E Retirement Plan Services pretax operating earnings growth of 11.7% in 2017E and 4.3% in 2018E Life Insurance pretax operating earnings growth of 5.5% in 2017E and 10.5% in 2018E Group Protection operating earnings growth of 57.5% in 2017E and 4.4% in 2018E Other Operations operating losses of $156 million in 2017E and $144 million in 2018E Annualized equity market return of 8% Tax rate of 24% for both full year 2017E and 2018E.


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Exhibit 14. Lincoln National Corporation (LNC) Income Statement Model $ Millions Except Per Share Data


INCOME FROM OPERATIONS

Annuities 751 925 996 218 235 230 270 953 978 941

Retirement Plan Services 141 160 140 31 31 40 41 143 159 166

Total Retirement Solutions 892 1,085 1,136 249 266 270 310 1,096 1,138 1,107 Life Insurance 544 611 371 75 120 133 117 445 469 518

Group Protection 70 23 43 5 15 17 12 50 78 81

Total Insurance Solutions 614 634 414 80 135 150 129 494 547 599 Other Operations (121) (107) (156) (15) (28) (33) (41) (117) (156) (144)

Operating Income 1,385 1,612 1,394 314 373 388 398 1,473 1,534 1,562 Other - - (7) (7) - - - (7) - -

Operating Earnings Available to Common 1,385 1,612 1,387 307 373 388 398 1,466 1,534 1,562 Operating EPS 5.03 6.03 5.44 1.25 1.56 1.61 1.69 6.10 6.75 7.25 % Change 12.3% 19.7% -9.7% -7.3% 6.9% 44.9% 9.8% 12.1% 10.6% 7.5%

Actual and Diluted Share CalculationsAverage Shares Outstanding- Diluted 275 268 255 245 240 240 236 240 227 215

Average Shares Outstanding- Basic 265.7 260.9 250.7 241.7 236.5 230.6 226.2 233.7 217.5 205.1

Average Shares Outstanding- Diluted 275.2 267.5 254.9 245.1 239.9 240.3 236.0 240.3 227.4 215.4 EoP shares, assuming conversion of preferreds 262.9 256.6 243.8 239.0 232.8 228.4 224.0 224.0 211.1 199.4

EoP shares, diluted 272.2 261.5 246.7 242.2 236.3 232.0 227.7 227.7 215.1 203.7 Dividend ActivityDividends, per share 0.48 0.68 0.80 0.25 0.25 0.25 0.25 1.00 1.20 1.40

Total Dividends paid to shareholders 128 177 201 60 59 58 57 234 261 287

Total Shares Repurchased ($ amt) 450 650 900 200 275 175 175 825 600 600

Total Payout 578 827 1,101 260 334 233 232 1,059 861 887

Dividend Ratio 10% 12% 17% 30% 18% 21% 20% 22% 17% 18%

Total S/H Payout Ratio 46% 55% 94% 130% 103% 87% 81% 100% 56% 57%

Book Value and ROE Calculations:Book Value per share ex AOCI $45.23 $49.28 $52.39 $53.25 $54.66 $55.88 $57.20 $57.20 $63.90 $71.03Book Value per share $51.17 $61.34 $55.85 $61.33 $68.38 $69.87 $71.46 $71.46 $79.03 $87.05

Ann. Operating ROE (ex AOCI) 12.1% 13.1% 10.9% 9.6% 11.7% 12.2% 12.4% 11.5% 11.7% 11.3%

OPERATING DATANet IncomeRealized gain (loss) related to investments (179) (106) (189) (102) (57) (125) (125) (409) - -

Benefit Ratio Unlocking/Other 37 7 (28) (4) 9 0 0 5 0 0

Gain on sale of subsidiaries/businesses - - - - - - - - - -

Reserve development/amortization of def gains - - - - - - - - - -

Income from Discontinued operations - - - - - - - - - -

Net Income Avilable to Common Shareholders 1,243 1,513 1,170 201.0 325.0 268.3 285.2 1,062 1,534 1,562 Net EPS 4.52 5.66 4.59 0.82 1.36 1.12 1.21 4.42 6.75 7.25

Balance SheetAssetsTotal Investments 95,291.0 102,967.0 102,208.0 106,371.0 110,587.0 108,143.5 108,598.5 108,598.5 114,303.3 120,022.8

Total Assets 236,945 253,377 251,937 255,718 263,028 263,765 264,875 264,875 278,789 292,739

x Equity 19.9x 20.0x 19.7x 20.1x 20.7x 20.7x 20.7x 20.7x 20.7x 20.7x

LiabilitiesTotal Insurance and Inv. Contract Liabilities 91,799 95,569 98,070 98,913 99,605 99,989 100,415 100,415 105,758 111,114

Liabilities related to separate accounts 117,135 125,265 123,619 123,506 125,033 125,515 126,050 126,050 132,756 139,480


Total Shareholders Equity 13,453 15,740 13,617 14,658 15,920 15,956 16,009 16,009 16,682 17,357

Total Common Shareholders Equity 13,453 15,740 13,617 14,658 15,920 15,956 16,009 16,009 16,682 17,357

Total Common Shareholders Equity ex AOCI 11,890 12,644 12,772 12,727 12,725 12,761 12,814 12,814 13,487 14,162

Total Liabilities and Equity 236,945 253,377 251,937 255,718 262,778 263,765 264,875 264,875 278,789 292,739 Source: Company data and Wells Fargo Securities, LLC estimates


88


Lincoln National, based in Radnor, Pennsylvania, is a holding company, which operates multiple insurance and retirement businesses through subsidiary companies. The company offers a wide range of wealth, protection, accumulation, and retirement income products and solutions, such as, life insurance, annuities and investment management products. Its insurance products are marketed mostly under the Lincoln Financial Group label.

WELLS FARGO SECURITIES, LLC Primerica, Inc. EQUITY RESEARCH DEPARTMENT

89

Primerica, Inc. PRI: Initiating Coverage With A Market Perform Rating Summary: We are initiating coverage on Primerica with a Market Perform

rating on the shares and a valuation range of $58-$60. Our EPS estimates are $4.38 for 2016 and $4.90 for 2017. We like the company’s business model, as well as its strong earnings growth, high returns on equity, and investment leverage. Still, given the potential risks related to the final fiduciary rules and the company’s multi-level marketing strategy, we think the stock is fairly valued at around 12x forward earnings (which is also its historical average).

Uncertainty related to the DOL’s fiduciary rules. For most of the last two years, the central controversy on the stock was the ability of PRI to successfully navigate the Department of Labor’s (DOL) fiduciary duty rules for qualified retirement assets, where shorts focused on the practice of selling mutual funds and annuities within IRAs via commissioned sales reps. Primerica has indicated it intends to operate under the Best Interest Contract exemption. The company expects the changes in commissions for mutual funds and variable annuities will not be too disruptive. In a worst-case scenario (ex. all sales-based earnings from U.S. qualified plans), the hit to pretax earnings would have been 10% in 2015.

Multi-level marketing strategy. In addition to the uncertainty related to the final fiduciary rules, we believe the new short theory is that Primerica as a multi-level marketing (MLM) is susceptible to the same sorts of criticisms that have been leveled at other MLMs like Herbalife. Although we think Primerica’s processes related to recruitment and compensation could be controversial, we believe this theory largely ignores the reality of life insurance: the product is highly regulated and requires an insurable interest (i.e. the life of a named person). PRI cannot book revenue until the insurable interest has paid premium on a policy taken out on his or her name, and there is no uncertainty related to money-back guarantees on products offered by the company.

Strong growth in operating EPS coupled with high ROAE. Since 2011, Primerica has increased its operating EPS at a CAGR of 16%. Meanwhile, the company’s net operating return on adjusted stockholder’s equity (ROAE) also increased from 11.8% in 2011 to 18.3% year-to-date in 2016. To us, the company’s strong growth and high returns relative to most life insurance peers were in part driven by a fast-growing life-licensed sales force combined with increasing term life sales productivity. Over the last five years, Primerica has increased its life-licensed sales force from roughly 90,000 to around 112,000 at the end of Q2 2016. Life productivity also recovered from the lows in 2014 to over 0.23 in Q2 2016 (closer to the high achieved in Q3 2011).

Q3 preview. We are forecasting EPS of $1.12 versus consensus of $1.12. Our Q3 EPS estimate reflects the impact related to a stronger-than-expected equity market performance and lower interest rates in the quarter.

Valuation Range: $58.00 to $60.00 from NE to NE Our valuation range is based on a 12x multiple on our 2017E earnings of $4.90 per share. Risks to our valuation range include unfavorable regulatory changes, weak equity markets, falling investment income, rising capital needs, and credit losses. Investment Thesis: We like Primerica's business model, as well as the company's relatively low investment leverage and high growth rate. Still, we think PRI's risk/reward is fairly balanced at this point and we don't see material upside in the shares from here.

Market Perform


Market Weight



Operating EPS

Ticker PRI

Price (09/22/2016) $57.43 52-Week Range: $37-60 Shares Outstanding: (MM) 46.5 Market Cap.: (MM) $2,670.5 S&P 500: 2,178.01 Avg. Daily Vol.: 370,851 Dividend/Yield: $0.72/1.3% LT Debt: (MM) $803.0 LT Debt/Total Cap.: 41.2% ROE: 18.0% 3-5 Yr. Est. Growth Rate: 10.0% CY 2016 Est. P/EPS-to-Growth: 1.3x Last Reporting Date: 08/08/2016






90

Investment Thesis We like Primerica’s business model, as well as the company’s low investment leverage and high growth rate (for a life insurer). The stock has recovered from lows earlier this year induced by the final fiduciary rules from the Department of Labor (DOL), and is trading roughly at its historical level of 12x forward earnings. We think PRI’s risk/reward is fairly balanced at this point and we don’t see material upside potential in the shares from here. Valuation Given PRI’s double-digit EPS growth trajectory, we prefer to value PRI on a P/E basis. Our valuation range is based on a 12x multiple on our 2017E earnings of $4.90 per share. Risks to our valuation range include unfavorable regulatory changes, weak equity markets, falling investment income, rising capital needs, and credit losses. For most of the last two years, the central controversy on the stock was the ability of Primerica to successfully navigate the Department of Justice’s (DOJ) fiduciary duty rules for qualified retirement assets, where shorts focused on the practice of selling mutual funds and annuities within IRAs via commissioned sales reps. The shares have largely recovered from DOL-induced lows, and is trading roughly at its historical level (12x NTM earnings). Exhibit 1. PRI Price-To-Book (ex AOCI) Multiples Exhibit 2. PRI Price-To-Earnings Multiples

2.37x

Average, 2.14x

1.5x

1.7x

1.9x

2.1x

2.3x

2.5x

2.7x

Ap

r-1

4

Jul-

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-15

Ap

r-1

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Jul-

15

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-15

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-16

Ap

r-1

6

Jul-

16

Pric

e to

Adj

uste

d B

ook

PRI

PRI Average


7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

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16.0x

Au

g-13

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-14

Au

g-14

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-15

Au

g-15

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-16

Pric

e to

NTM

Ear

ning

s

PRI

PRI Average



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Investment Opportunities Strong growth in operating EPS coupled with high ROAE. Since 2011, Primerica has increased its operating EPS at a CAGR of 16%. Meanwhile, the company’s net operating return on adjusted stockholder’s equity (ROAE) also increased from 11.8% in 2011 to 18.3% year-to-date in 2016. To us, the company’s strong growth and high returns relative to most life insurance peers were in part driven by a fast-growing life-licensed sales force combined with increasing term life sales productivity. Over the last five years, Primerica has increased its life-licensed sales force from roughly 90,000 to around 112,000 at the end of Q2 2016. Life productivity, defined as policies issued divided by the average number of life-licensed representative per month, also recovered from the lows in 2014 to over 0.23 in Q2 2016 (closer to the high achieved in Q3 2011). Exhibit 3. A Fast-Growing Sales Force Exhibit 4. Life Productivity Back To Around 2011 High

80

85

90

95

100

105

110

115

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

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Q2

2011

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Q4

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Q1

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Q3

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Q4

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Q1

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Q2

2016

Thou

san

ds

Life-Licensed Sales Force

0.16x

0.17x

0.18x

0.19x

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0.21x

0.22x

0.23x

0.24x

0.25x

Q1

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Average Monthly Productivity Rate

Source: FactSet, company data and Wells Fargo Securities, LLC Investment Risks Uncertainty around DOJ fiduciary duty impact. After the DOJ published the final fiduciary rules for qualified retirement plans earlier this year, Primerica announced the company was going to utilize the Best Interest Contract Exemption (BICE) in selling investment and savings products. Since that time, the hit to Investment and Savings Product (ISP) earnings has been framed in terms of expense items amounting to $2 million per quarter through the end of 2017. We find it useful to look at what Primerica said before the company decided to go the BICE route. The bottom line: the sales-based earnings from U.S. qualified plans that were at risk from the rule amounted to $32 million in 2015, or roughly 10% of total company pre-tax earnings. Exhibit 5. Before PRI changed position on BICE, the estimated hit to pretax earnings was 10% of total

$56 million (38%) of earnings not impacted by DOL rule:

-Canadian ISP; Managed Accounts; Non-qualified Accounts$23 million (16%) of accounts-based earnings, most of

which should be preserved$35 million (24%) of asset-based earnings from US qualified retirement

plans should be grandfathered in$32 million (22%) of sales-based earnings from US qualified plans that

at risk were at risk dependent on the final rule and/or ability to execute alternative

38%

16%

22%

24%

2015 ISP Pretax Op. Earnings = $146.1 million



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Primerica believes that company reps will continue to be able to receive commissions for ISP product sales, as long as those commissions are “levelized”, i.e., sales of one mutual fund or variable annuity will not result in the rep getting paid a higher commission than another mutual fund or variable annuity. According to Primerica at a recent investor conference, “some media” reported mutual fund commissions for Class A shares would be around 3-3.5% under the DOL’s fiduciary rules, which should be manageable as the average compensation that the company put into the commission grid for its mutual funds is about 3.5%. For variable annuities, the same media reported that commissions would be higher at around 5% due to their complexities, and is near Primerica’s current average. We note have been unable to find published reports pointing to those commissions. Out of the 18,000 mutual fund licensed representatives in the U.S., 1,000 personally produce 51% of U.S. ISP sale. Those same 1,000 reps sold only 5% of issued life policies in 2005. One leg of the short thesis was that if the commission income those 1,000 reps generated from selling investment products were impaired by the fiduciary duty rules, they would leave the Primerica banner since they were not leaving much on the table in the way of term life commissions. What that argument misses is the fact that those reps are generally very tenured in the Primerica system, and are entitled to override on sales made from people brought on board under their tree. On average personal life sales activity and overrides for the top 1,000 ISP reps generated one-third of their income in 2015. Since those overrides would disappear if those reps left Primerica, we think the likelihood of a mass exodus of top producers is remote. Of the remaining 17,000 largely part-time ISP reps, one-third of their income was from ISP and 2/3 was from term life. Multi-level marketing strategy. Short interest is elevated on PRI shares (22% of shares outstanding, 16.5 days to cover). While there is a contingent of investors who still believes Primerica’s ISP business will not be able to transition to a post-fiduciary duty framework, we believe the new short theory is that Primerica as a multi-level marketing (MLM) is susceptible to the same sorts of criticisms that have been leveled at other MLMs like Herbalife. In July 2016, Herbalife agreed to fully restructure its U.S. business operations and pay $200 million to compensate consumers to settle the charges brought forward by the Federal Trade Commission (FTC). In its complaint against Herbalife, the FTC charged that the company deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products. In addition, the commission charged that the MLM company’s compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product, causing substantial economic injury to many of its distributors. According to the FTC, this settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit. Further, Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what the commission charges are unfair and deceptive practices. While we think Primerica’s processes related to recruitment and compensation could be controversial, we believe this “Primerica is a pyramid scheme” theory largely ignores the reality of life insurance: the product is highly regulated and requires an insurable interest (i.e. the life of a named person). PRI cannot book revenue until the insurable interest has paid premium on a policy taken out on his or her name, and there is no uncertainty related to money-back guarantees on products offered by the company. Failure to continue to attract new recruits, retains sales representatives or license or maintain the licensing of sales representatives. While we don’t believe there is anything improper or illegitimate about Primerica’s distribution model, the fact is the growth (by insurance standards) stock multiple is a function of earnings growth, which itself is a function of sales growth. Since sales production per licensed representative tends to cluster in a narrow band, the only way to continue to grow sales is to attract new recruits, get those recruits licensed, and then retain those licensed sales representatives.


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Company Overview “Buy Term and Invest the Difference” is the cornerstone of Primerica’s consumer-oriented concepts and products. Through mass-marketing this concept, the company has grown from a small company in 1977 with only 85 agents in Atlanta, Georgia to now a leading distributor of financial products to middle income households in the United States and Canada with 106,710 licensed sales representatives at December 31, 2015. PRI assists its clients in meeting their needs for term life insurance, which PRI underwrites, and mutual funds, annuities and other financial products, which the company distributes primarily on behalf of third parties. Primerica uses three operating segments to organize, evaluate and manage its business: Term Life Insurance, Investment and Savings Products, and Corporate and Other Distributed Products. Exhibit 6. Operating Earnings (Ex. Corporate) By Segment, 2015

Term life , 54.2%

Investment & savings

products , 45.8%

Source: Company data and Wells Fargo Securities, LLC Summary Business Unit Discussion Term Life Insurance: The Term Life Insurance segment includes underwriting profits on the company’s in-force book of term life insurance policies, net of reinsurance, which are underwritten by Primerica’s life insurance company subsidiaries. Primerica offers term life insurance to clients in the United States, its territories, the District of Columbia and Canada through its three life insurance subsidiaries – Primerica Life, NBLIC and Primerica Life Canada. In 2014, the latest period for which data is available, the company ranked as a leading provider of individual term life insurance in the U.S. in an annual study published by LIMRA. Exhibit 7. Term Life Insurance Pretax Operating Income And Margin ($ in millions)

Exhibit 8. Investments And Savings Products Pretax Operating Income And Margin ($ in millions)

$154 $138 $151 $153 $173 $104

7.2%6.3%

18.6%17.1% 17.3%

18.9%

0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%18.0%20.0%

$0$20$40$60$80

$100$120$140$160$180$200

2011 2012 2013 2014 2015 H1 2016

$117 $121 $121 $146 $146 $68

53.1% 54.4%

50.9%

57.3% 56.4%

53.2%

46.0%

48.0%

50.0%

52.0%

54.0%

56.0%

58.0%

$0

$20

$40

$60

$80

$100

$120

$140

$160

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Investment and Savings Products. The Investment and Savings Products segment includes retail and managed mutual funds and annuities distributed through licensed broker-dealer subsidiaries and includes segregated funds, an individual annuity savings product that the company underwrites in Canada through Primerica Life Canada. In the United States, the company distributes mutual fund and annuity products of several third-party companies. Primerica also earns fees for account servicing on a subset of the mutual funds the company distributes. In Canada, the company offers a Primerica-branded fund-of-funds mutual fund product, as well as mutual funds of well-known mutual fund companies.


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Primerica’s products comprise basic saving and investment vehicles that seek to meet the needs of clients in all stages of life. Through PFS, PFS Investments, Primerica Life Canada, PFSL Investments Canada, and Primerica’s licensed sales representatives, the company distributes and sells to its clients mutual funds, managed investments, variable and fixed annuities, fixed indexed annuities and segregated funds. As of year-end 2015, roughly 23,660 of the company’s sales representatives were licensed to distribute mutual funds in the United States (including Puerto Rico) and Canada. As of December 31, 2015, around 13,300 of Primerica’s sales representatives were licensed and appointed to distribute annuities in the United States and approximately 9,900 of the company’s sales representatives were licensed to sell segregated funds in Canada. Investment Portfolio A large percentage of Primerica’s invested asset portfolio is invested in fixed-income securities. The company’s insurance business is primarily focused on selling term life insurance, which does not include an investment component for the policyholder. The invested asset portfolio funded by premiums from its term life insurance business does not involve the substantial asset accumulations and spread requirements that exist with other non-term life insurance products. As a result, the profitability of the term life insurance business is not as sensitive to the impact that interest rates have on PRI’s invested asset portfolio and investment income as the profitability of other companies that distribute non-term life insurance products. The company follows a conservative investment strategy designed to emphasize the preservation of its invested assets and provide adequate liquidity for the prompt payment of claims. Primerica may also direct its investment managers to invest some of the company’s invested asset portfolio in currencies other than the U.S. dollar. A portion of PRI’s portfolio is invested in assets denominated in Canadian dollars, which, at minimum, would equal its reserves for policies denominated in Canadian dollars. Exhibit 9. Investment Portfolio By Asset Class, 6/30/2016

90.08%

8.67%

1.28%1.25%

0.72%

Other Securities


Securities Owned: CommonCorporate Equity

Policy Loans

Securities Owned: PreferredCorporate Equity



95

Capital Profile We summarize the financial strength ratios of Primerica’s primary companies below. Exhibit 10. Financial Strength Ratings of Primary Companies


National Benefit Life Insurance Co. - Remove3/7/2003 -

A+Affirm7/21/2016

Primerica Life Insurance Co. A2 (OS)Affirm6/24/2014

AA- (OS)Downgrade4/1/2010

Remove6/19/2013

A+Affirm7/21/2016



Glenn Jackson Williams Chief Executive Officer 56 Joined in 1981 0.14

Alison Sue Rand Executive VP & CFO 48 Joined in 1995 0.09

Gregory Carl Pitts Executive VP & COO 53 Joined in 1985 0.03

Peter Wayne Schneider President 59 Joined in 2000 0.00

Source: Company data and Wells Fargo Securities, LLC Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: Share repurchases of $166 million, $150 million and $25 million for full year 2016E, 2017E, and 2018E. Consolidated operating EPS annual growth of 11.9% in 2017E and 10.1% in 2018E. Total term life pretax operating earnings growth of 8.7% in 2017E and 7.5% in 2018E Investment & savings products pretax operating income growth of 5.0% in 2017E and 1.1% in 2018E Corporate and Other operating losses of $37 million for full year 2017E and $36 million for 2018E Annualized equity market return of 8% Tax rate of 35.0% for both full year 2017E and 2018E.


96

Exhibit 12. Primerica (PRI) Income Statement Model $ Millions Except Per Share Data

Fiscal Year Ends December 31 2013 2014 2015 Q1 2016 Q2 2016 Q3 2016E Q4 2016E 2016E 2017E 2018EOVERVIEWPre-tax Operating Income Total term life 151 153 173 46 58 55 56 215 234 251

Investment & savings products 121 146 146 32 36 35 36 138 145 147

Corporate & other (11) (18) (27) (7) (6) (8) (9) (29) (37) (36)

Total pre-tax operating earnings 260 282 293 71 88 82 83 324 342 362 Tax rate 35.8% 35.1% 34.7% 35.5% 35.4% 35.0% 35.0% 35.2% 35.0% 35.0%

Taxes (93) (99) (102) (25) (31) (29) (29) (114) (120) (127)

After-tax operating income 167 183 191 46 57 53 54 210 222 235 % grow th -4.3% 9.5% 4.5% 7.3% 17.0% 7.6% 7.5% 9.9% 5.8% 6.0%

Operating earnings attributable to unvested equity aw a (3) (2) (2) (0) (0) (0) (0) (2) (2) (2)

% of operating earnings attributable to unvested equity 1.6% 1.1% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%

Adjusted operating EPS $2.91 $3.31 $3.72 $0.93 $1.19 $1.12 $1.15 $4.38 $4.90 $5.40 % grow th 6.6% 13.9% 12.4% 16.6% 27.0% 14.1% 13.3% 17.8% 11.9% 10.1%

Realized gains / (losses) 6 (0) (2) (1) 3 (1) (1) 2 (2) (2)

Ceded premiums - reinsurance recoveries - - - - - - - - - -

Initial mgmt & f ield equity grants / other (19) (4) 0 0 0 0 0 0 0 0

Items excluded from operating income, pre-tax (12) (4) (2) (1) 3 (1) (1) 2 (2) (2)

Tax impact on items excluded from operating income 4 2 1 0 (1) 0 0 (1) 1 1

Items excluded from operating income, after-tax (8) (3) (1) (1) 2 (0) (0) 1 (1) (1)

Net income 159 180 190 45 59 53 54 211 221 234

Net income attributable to unvested equity aw ards (3) (2) (2) (0) (0) (0) (0) (2) (2) (2)

Net income per share 2.76 3.26 3.70 0.92 1.23 1.11 1.14 4.41 4.88 5.37

Share CalculationsParticipating shares, BOP 56 55 52 48.3 47.3 47.3 46.6 48 46 43

Shares repurchased (4) (3) (5) (1.2) (0.8) (0.7) (0.7) (3) (3) (0)

Other change 3 0 0 0 0 0 0 0 0 0

Participating shares, EOP 54.8 52.2 48.3 47.3 47.3 46.6 45.9 45.9 43.3 42.9 Average diluted participating shares 56.6 54.6 50.9 48.6 47.7 47.3 46.6 47.5 44.9 43.3 Dividend per share 0.44 0.48 0.64 0.17 0.17 0.17 0.17 0.68 0.80 0.92

Payout ratio 15.1% 14.5% 17.2% 18.2% 14.3% 15.2% 14.8% 15.5% 16.3% 17.0%

BVPS and ROEBVPS, GAAP reported 22.29 23.87 23.72 24.80 25.53 26.06 26.62 26.62 29.04 33.29

BVPS, Adjusted 21.08 22.45 23.06 23.77 24.10 24.61 25.15 25.15 27.48 31.71 BVPS, ex AOCI 20.32 22.04 23.47 23.85 24.20 24.87 25.41 25.41 27.76 31.99

Adjusted Operating ROE, reported 13.6% 14.5% 16.0% 15.8% 19.2% 17.6% 17.7% 17.6% 17.9% 17.7%

Operating ROE, adjusted book value 14.5% 15.4% 16.8% 16.3% 20.2% 18.6% 18.7% 18.5% 19.0% 18.6%Adjusted Operating ROE, ex AOCI 15.2% 15.9% 16.8% 16.2% 20.1% 18.5% 18.5% 18.3% 18.8% 18.4%

Equity RollforwardShareholders' equity EOP 1,222 1,245 1,146 1,173 1,207 1,215 1,223 1,223 1,259 1,428

Cumulative translation adjustment 42 22 (20) (4) (5) (12) (12) (12) (12) (12)

Other AOCI 66 74 32 49 68 68 68 68 68 68

Adjusted Shareholders Equity 1,156 1,171 1,114 1,124 1,140 1,147 1,155 1,155 1,191 1,361

Shareholders' equity ex AOCI 1,114 1,150 1,134 1,128 1,145 1,159 1,167 1,167 1,203 1,373

Abbreviated Balance SheetTotal investments and cash 1,985 2,261 2,331 2,374 2,459 2,459 2,459 2,459 2,459 2,459

Total assets 10,330 10,738 10,612 11,013 11,205 11,260 11,320 11,320 11,583 12,832

xEquity excl separate account 6.4x 6.7x 7.5x 7.5x 7.4x 7.4x 7.4x 7.4x 7.4x 7.4x

Total liabilities 9,108 9,493 9,466 9,840 9,997 10,045 10,097 10,097 10,324 11,404

xEquity excl separate account 5.4x 5.7x 6.5x 6.5x 6.4x 6.4x 6.4x 6.4x 6.4x 6.4x

Total shareholders' equity 1,222 1,245 1,146 1,173 1,207 1,215 1,223 1,223 1,259 1,428 Source: Company data and Wells Fargo Securities, LLC estimates Company Description:

Primerica Inc, headquartered in Duluth, Georgia, is a distributor of financial products spun off from parent Citigroup in 2010. The largest financial services marketing organization in North America, Primerica provides term life insurance and sells mutual funds, variable annuities, and other financial services.

WELLS FARGO SECURITIES, LLC Prudential Financial, Inc. EQUITY RESEARCH DEPARTMENT

97

Prudential Financial, Inc. PRU: Resuming Coverage With A Market Perform Summary: We are resuming coverage on Prudential Financial with a Market

Perform rating on the shares, a change in analyst, and a valuation range of $82-$86 per share. Our EPS estimates are $8.87 for 2016 and $10.29 for 2017. We see the company as a franchise name among global life insurers, with key strengths highlighted by a dominant market position in large case pension risk transfer, a broad and diversified business mix, and a high return Japanese business.

Profit upside potential from pension closeout deals. For midsize to large case pension closeouts (Prudential’s major focus), we think there are several catalysts that should drive sales in the market: (1) the adoption of mark-to-market pension accounting, (2) increasing PBGC premiums, and (3) pension mortality table updates reflecting longevity improvement. While jumbo-sized deals are more episodic by nature, we expect Prudential will remain the go-to choice given its experience, back-office capacity, as well as a large balance sheet.

Well-diversified business mix generating superior results. To us, Prudential’s earnings are diversified across products and services (life insurance, annuities, retirement-related services, mutual funds, and investment management), market segments (individual and institutional), geographic markets (domestic and international), and types of risks (insurance and asset management). Based on H1 2016 results, we think PRU is on track to achieve a return on equity of around 12%, below the company’s over-the-cycle goal of 13-14% but well above the peer average of around 10-11%.

Size and breadth allows for more complementary acquisitions. The company’s recent acquisitions have spanned across the globe, including an ownership stake in AFP Habitat in Chile, Star Life and Edison Life in Japan from AIG, as well as Hartford Life in U.S. from HIG. These acquisitions have created credible diversification and a business mix that allows the company to consistently generate over-the-cycle returns that are well above peers.

Liquidity and capital requirements. As proposed, non-bank SIFIs would need to maintain a liquidity buffer of highly-liquid diversified unencumbered assets to cover net cash flows for a 90 day period. In addition, stress testing for non-bank SIFIs would have to take place on a monthly basis and would include separate accounts and any closed blocks. Details of the capital rules are still not available but the Fed is looking to create risk categories for assets/liabilities across the holding company for which additional capital would be required.


Valuation Range: $82.00 to $86.00 from NE to NE Our valuation range is based on a 1x multiple of our Q3 2017E BVPS of $83 ex. accumulated other comprehensive income (AOCI) and adjusted for FX impact. Risks to achieving our valuation range include spread compression, credit losses, weak equity markets, volatility in FX, and equity capital issuance. Investment Thesis: We rate the shares of Prudential Market Perform. We see the company as a premium franchise name among global life insurers, but overall valuation of the company could remain compressed due to uncertainty associated with non-bank SIFI liquidity and capital rules, as well as capital market risks.

Market Perform


Market Weight



Operating EPS

Ticker PRU







98

Investment Thesis We rate the shares of Prudential Market Perform. We see the company as a franchise name among global life insurers, with key strengths highlighted by a dominant market position in the large-case pension risk transfer business, a broad and diversified business mix, and a high-return Japanese business. Still, we think the overall valuation of company could remain compressed due to uncertainty associated with non-bank SIFI liquidity and capital rules, as well as volatility in its fee-based businesses due to capital market risks. Valuation Our valuation range brackets a 1.0x multiple of our estimated Q3 2017E BVPS of $83.19 ex. accumulated other comprehensive income (AOCI) and adjusted for FX impact. Risks to achieving our valuation range include spread compression, credit losses, weak equity markets, volatility in FX, and equity capital issuance. Exhibit 1. PRU Price-To-Book (ex AOCI) Multiples Exhibit 2. PRU Price-To-Earnings Multiples

1.05x

Average, 1.23x

0.6x

0.7x

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

1.4x

1.5x

1.6x

Se

p-13

Dec

-13

Mar

-14

Jun

-14

Se

p-14

Dec

-14

Mar

-15

Jun

-15

Se

p-15

Dec

-15

Mar

-16

Jun

-16

Se

p-16

Pric

e to

Boo

k (e

x AO

CI)

PRU

PRU Average


5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

Se

p-13

Dec

-13

Mar

-14

Jun

-14

Se

p-14

Dec

-14

Mar

-15

Jun

-15

Se

p-15

Dec

-15

Mar

-16

Jun

-16

Pric

e to

NTM

Ear

ning

s

PRU

PRU Average

Source: Company data and FactSet Investment Opportunities Profit upside potential from pension closeout deals. Since 2011, pension close-outs have played an increasingly significant role in the earnings contribution to Prudential’s Retirement segment, in particular after the company completed two jumbo-sized transactions in 2012 (roughly $25 billion and $8 billion in group annuity contracts sold to GM and Verizon, respectively). Despite lower interest rates, against the backdrop of strong equity market, the adoption of mark-to-market pension accounting, increasing PBGC premiums, and pension mortality table updates, we think there could be significant profit upside from new sales in the mid- to large-case market, as well as from in-force contracts over time. Historically the pension close-out industry is fragmented, with annual sales fluctuating in low-single-digit billions. Including mutual companies, there are currently around 13 active players in the marketplace, including American General Life (AIG), American United Life (OneAmerica), Banner Life (Legal & General), John Hancock Life, Massachusetts Mutual Life, Metropolitan Life (MET), New York Life, Pacific Life, Principal Life (PFG), Prudential Insurance Company of America (PRU), Transamerica Life, United of Omaha Life, and Voya. The pace of transactions has picked up significantly in the last couple of years, with sales totaling $8.5 billion and $13.6 billion in 2014 and 2015, respectively. Prudential has been the dominating player in the recent years with two jumbo deals and multiple large transactions (including those that the company partnered with other life insurers). For midsize to large case pension closeouts (Prudential’s major focus), we think there are several catalysts that should drive sales in the market: (1) the adoption of mark-to-market pension accounting, (2) increasing PBGC premiums, as well as (3) pension mortality table updates reflecting longevity improvement. While jumbo-sized deals are more episodic by nature, we expect Prudential will remain the go-to choice given its experience, back-office capacity, as well as a large balance sheet.


99

Exhibit 3. Pension Closeout Sales ($ in millions)

$0.6$1.8 $2.7 $2.3

$0.8 $0.7 $0.9

$35.3

$3.6

$8.5

$13.6

$2.1

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

Tota

l Pre

miu

m (

bil

lion

s)

Source: Company data and Wells Fargo Securities, LLC International Accounting Standard 19 (IAS 19), an accounting rule that has been in place since 2012, requires at least partial mark-to-market pension accounting for non-U.S. corporations. As U.S. GAAP continues its path of convergence with IAS, we expect there could be a similar shift in U.S. pension accounting over the next 2-3 years. Some U.S. companies have already adopted mark-to-market pension accounting, including AT&T (T), FedEx (FDX), Ford (F), Honeywell (HON), International Business Machines (IBM), Johnson Controls (JCI), Verizon (VZ), and UPS (UPS), with the intention of making earnings reporting more transparent. However, the move to recognize pension investment and actuarial gains or losses immediately has also introduced substantial volatility in balance sheets and earnings, something we think could prod other midsize to large companies to transfer at least some of their pension liabilities (a total of roughly $2.1 trillion from the S&P 500 companies as of year-end 2015) to Prudential and others. The Highway Bill (H.R. 4348), signed in July 2012, has substantially increased the Pension Benefit Guaranty Corporation (PBGC) premiums for single-employer plans since the beginning of 2013. Historically for single-employer plans, the PBGC premiums include the flat-rate premium that ranged from $31 in 2007 to $64 in 2016 per participant, as well as a variable-rate premium that ranged from $9 in 2007 to $30 in 2016 for each $1,000 of unfunded vested benefits. To us, the rapidly increasing PBGC premiums could be another catalyst that causes pension plan sponsors to reconsider terminating their frozen plans. Exhibit 4. PBGC Premiums for Single-Employer Plans

Rate per $1,000 unfunded vested Per partipant cap

2007 $31 $9 N/A2008 $33 $9 N/A2009 $34 $9 N/A2010 $35 $9 N/A2011 $35 $9 N/A2012 $35 $9 N/A2013 $42 $9 $4002014 $49 $14 $4122015 $57 $24 $4122016 $64 $30 $500

Variable-rate premiumYear Flat-rate per

participant

Source: The Pension Benefit Guaranty Corporation and Wells Fargo Securities, LLC


100

On October 8 2015, the Society of Actuaries (SOA) released an updated mortality improvement scale, MP-2015, which updates MP-2014 by reflecting two additional years (2010 and 2011) of U.S. population mortality improvement data from the Social Security Administration (SSA). Depending on plan type, plan provisions, and participant characteristics, the SOA expects the complete adoption of MP-2015 (which also includes updating the RP-2014 base mortality tables) will reduce pension liabilities by around 1-2% compared to using RP-2014 and MP-2014. The Society of Actuaries now intends to provide future annual updates (compared to a prior intention of at least every three years) as soon as practicable following the public release of updated data from the SSA. More frequent updates on mortality could potentially bring the GAAP value of pension liabilities closer to their true economic cost, which should induce better risk management orientation as well as demand for pension risk transfer solutions, in our view. A broad and well-diversified business mix generating consistent results that are above peers. To us, Prudential is the most diversified life insurance company in our coverage universe. Earnings are diversified across products and services (life insurance, annuities, retirement-related services, mutual funds, and investment management), market segments (individual and institutional), geographic markets (domestic and international), and types of risks (insurance and asset management). Based on H1 2016 results, we think PRU is on track to achieve a return on equity of around 12%, below the company’s over-the-cycle goal of 13-14% but well above the peer average of around 10-11%. Roughly half of the Prudential’s earnings come from its Japanese operations, which are largely insulated from U.S. interest rate and equity market risks. The company entered the Japanese market in August 1979, and is now one of the largest life insurers in Japan, with roughly 10% market share based on new business face amount. The company offers a diversified product mix, including death protection, as well as retirement and savings products primarily denominated in yen. Also, Prudential offers certain health products with fixed benefits (some of which include a high savings element), as well as fixed annuity products that are largely denominated in U.S. and Australian dollars. Returns and earnings from PRU’s Japanese operations historically have been high (in excess of 20% in return on equity) with relatively lower volatility, as they are primarily driven by stable mortality and expense margin. Exhibit 5. Book Value And ROE

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

Q32013

Q42013

Q12014

Q22014

Q42014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Book Value (Excl. AOCI with FX remeasurement)

Ann. Adj. Oper. ROE (Excl. AOCI with FX remeasurement)

Source: Company data and Wells Fargo Securities, LLC Prudential’s size and breadth allows for a more robust set of complementary acquisitions. The company’s recent acquisitions have spanned across the globe, including an ownership stake in AFP Habitat in Chile, Star Life and Edison Life in Japan from AIG, as well as Hartford Life in U.S. from HIG. Due to the size and breadth of Prudential’s businesses, the company could consider a wider range of complementary acquisitions to enhance business capabilities, as well as to improve product mix. Over the years Prudential has demonstrated an exemplary track record in acquisitions, which were all built upon its business strategies, as well as core competencies and capabilities. The execution of these transactions were the best of their kind, in our view, including the acquisitions of American Skandia in 2003 (strengthened its distribution network and variable annuity capabilities), CIGNA in 2004 (added scale and capabilities to retirement business), Star and Edison in 2011 (extended its Japanese franchise), and Hartford Life in 2013 (added scale to existing operation while expanding its distribution reach). These acquisitions have created credible diversification and a business mix that allows the company to generate an over-the-cycle return on equity of 13-14%.


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Investment Risks Liquidity and capital requirements as a non-bank SIFI. In June, the Federal Reserve outlined requirements for insurance non-bank systematically important financial institutions (SIFIs). This included an advanced notice of proposed rulemaking (ANPR) on insurance capital rules as well as publishing a draft of enhanced prudential standards (including two standards--Corporate Governance and Risk Management; and Liquidity Risk Management) for insurance non-bank SIFIs. The Fed had asked for public comments on both ANPR and proposed rule. As proposed, non-bank SIFIs would need to maintain a liquidity buffer of highly-liquid diversified unencumbered assets to cover net cash flows for a 90 day period (as compared to 30 days for banks reflective of the longer term nature of insurance company liabilities). In addition, stress testing for non-bank SIFIs would have to take place on a monthly basis and would include separate accounts and any closed blocks. Cash flow testing could also include separate account assets and closed blocks in proportion to the cash flow needs in those accounts. In Prudential’s comments, the company requested that the Board consider an alternative, risk-based approach whereby PRU would perform comprehensive enterprise-wide short- and longer-term cash flow projections on a quarterly basis, and undertake a comprehensive evaluation of the liabilities underlying its activities at least annually. PRU also suggested that the requirement to conduct liquidity tests over a 7-day planning horizon should be similarly focused on only those activities that could generate material short term liquidity risks. The standards did not set forth how much additional capital the non-bank SIFIs would have to carry something which should be quantified when the non-bank SIFI capital rule is put forth following the comment period surrounding the potential for tiering of capital requirements. For the non-bank SIFIs the Fed is looking to create risk categories for assets/liabilities across the holding company for which additional capital would be required. The Fed has asked for public input on the categories. Exhibit 6. Impact on 2017E ROE from a Hypothetical Incremental Risk Buffer

-40

-90-130

-160-200

-230-260

-290-320

-350-400

-300

-200

-100

0$1.0 $2.0 $3.0 $4.0 $5.0 $6.0 $7.0 $8.0 $9.0 $10.0

Impa

ct o

n 20

17E

RO

E (b

ps)

Incremental risk buffer ($B)

Note: Assumes 2016E attributed equity of roughly $36 billion. Source: Company data and Wells Fargo Securities, LLC estimates Sustainable high returns from businesses in Japan. Returns on equity from Prudential’s International Insurance have returned to close to 20% since the acquisition of Star and Edison in 2011. To gauge the potential impact of sustained low interest rates in Japan on the company’s earnings, Prudential offered up a hypothetical scenario in its recent investor Tokyo investor day – running off its existing block and assuming the interest rate environment existing as of June 30 of this year remained unchanged over the forecast period and that the company followed its existing long-term plan of investments. Under this scenario, the estimated negative impact of flat rates on International Insurance pre-tax adjusted operating income (AOI) was $45 million in 2017, $130 million in 2018 and $200 million in 2019. Besides low interest rates, we think Prudential’s Japanese businesses could see some drag on sales and profitability going forward due to a lower standard rate on single pay and recurring premium whole life policies. The standard rate was reduced to 25 bps from 75 bps for single pay whole life in July 2016, while the standard rate for recurring premium whole life was expected to be also 75 bps lower effective April 2017. Capital market risks. For Prudential’s U.S. businesses, roughly 60% of the company’s pretax adjusted operating income (AOI) comes from more market-sensitive segments: Individual Annuities and Asset management. A market downturn, an increase in market volatility, and other market conditions could result in a decline in sales, as well as an increase in lapses, surrenders, and withdrawals of these investment-based products and services. Especially for variable annuity products with guaranteed minimum benefits, a market decline could further result in reserve strengthening, which may not be offset by greater persistency by fee streams. We do expect less volatility in the results in the future given the re-domestication of the VA captive.


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Also, prolonged low interest rates could also negatively affect Prudential’s profitability on spread-based products, in particular, the fixed annuities, universal life, and stable value products, all of which have a higher reliance on net investment margin. For Prudential’s Japanese businesses, the majority of earnings come from traditional death protection, and retirement and savings products that are denominated in both Japanese yen and U.S. dollars, as well as fixed annuity products that are denominated in U.S. dollars. Compared to the U.S. products, the Japanese product demand is more linked to disposable income, which could be adversely affected by failure of the recent political and financial reform (Abenomics) in Japan, which includes (1) aggressive monetary easing to support a target of 4% nominal growth (2% inflation and 2% real GDP growth); (2) flexible government spending on new publics works, and (3) a growth strategy through private sector investments. We think the negative interest rate impact on profitability should be manageable, largely due to product pricing and a rigorous asset-liability management program (including duration management and credit rate strategies). Company Overview Prudential traces its root to the Prudential Friendly Society, which was founded by insurance agent John Fairfield Dryden in a basement office in downtown Newark, NJ, in 1875. The company sold industrial insurance, which provided funeral and burial expenses for low-income families, with some weekly premiums as low as three cents. Still headquartered in Newark, the company now offers individuals and institutions in the U.S., Asia, Europe, and Latin America a wide array of financial products and services, including life insurance, annuities, mutual funds, investment management, and retirement related services. The company’s principal operations comprise four divisions, which together encompass seven segments, as well as its Corporate and Other operations. The U.S. Retirement Solutions and Investment Management division consists of the Individual Annuities, Retirement, and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of the Individual Life and Group Insurance segments. The International Insurance division consists of the International Insurance segment. The Closed Block division consists of its Closed Block segment. Exhibit 7. Operating Earnings (Ex. Corporate And Closed Block) By Segment, 2015

Individual Annuities,

23.8%

Retirement, 12.3%

Asset Management,

10.3%Individual Life,

8.4%

Group Insurance,

2.3%

Life Planner, 21.0%

Gibraltar Life & Other, 21.8%



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Summary Business Unit Discussion U.S. Retirement Solutions and Investment Management Division. Within this division, Prudential’s Individual Annuities segment manufactures and distributes individual variable and fixed annuity products, primarily to the U.S. mass affluent market. The Retirement segment provides retirement investment and income products and services to retirement plan sponsors in the public, private, and not-for-profit sectors. The company provides certain brokerage services through its broker-dealer, and also offers investment-only stable value products, pension risk transfer solutions and other payout annuities, including guaranteed investment contracts (“GICs”), funding agreements, structured settlement annuities and other group annuities for defined contribution plans, defined benefit plans, non-qualified plans, and individuals. Exhibit 8. Individual Annuities Pretax Earnings And Return On Assets ($ in millions)

Exhibit 9. Retirement Pretax Operating Earnings And Margin On Revenues ($ in millions)

$662 $1,039 $2,085 $1,467 $1,797 $755

0.60%

0.83%

1.4%

0.94%

1.15%

0.98%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

$0

$500

$1,000

$1,500

$2,000

$2,500

2011 2012 2013 2014 2015 H1 2016

$594 $638 $1,039 $1,215 $931 $455

12.2%

1.7%

17.2%

10.1%

7.9%

11.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC The Asset Management segment provides a broad array of investment management and advisory services through institutional portfolio management, retail funds management, private lending and asset securitization activity, and other structured products. These products and services are provided to third-party clients as well as other Prudential businesses. Exhibit 10. Asset Management Pretax Operating Earnings And Adjusted Margin ($ in millions)

Exhibit 11. Individual Life Pretax Operating Earnings And Margin ($ in millions)

$681 $584 $723 $785 $779 $372

17.9%

26.9%29.8% 30.4%

28.8% 28.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

2011 2012 2013 2014 2015 H1 2016

$482 $384 $583 $498 $635 -$170

16.6%

11.4%12.6%

9.5%12.1%

-6.7%-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

$700

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC U.S. Individual Life and Group Insurance Division. Within this division, the Individual Life segment manufactures and distributes individual variable life, term life and universal life insurance products primarily to the U.S. mass middle, mass affluent and affluent markets. The Group Insurance segment offers a full range of group life, long-term and short-term group disability, and group corporate-, bank- and trust-owned life insurance in the U.S. primarily to institutional clients for use in connection with employee plans and affinity groups. Prudential also sells accidental death and dismemberment and other ancillary coverages, and provides plan administrative services in connection with the company’s insurance coverages.


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Exhibit 12. Group Insurance Pretax Operating Earnings And Margin On Revenues ($ in millions)

Exhibit 13. Gibraltar Life and Other Pretax Operating Earnings And Margin ($ in millions)

$163

$16

$157

$23

$176

$1152.9%

0.3%

2.8%

0.4%

3.4%

4.3%

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%

$0$20$40$60$80

$100$120$140$160$180$200

2011 2012 2013 2014 2015 H1 2016

$1,017 $1,223 $1,597 $1,703 $1,681 $875

8.9%

5.9%

11.8%

15.8% 16.5% 16.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC International Insurance division. The International Insurance division conducts its business through the International Insurance segment, which manufactures and distributes individual life insurance, retirement and related products, including certain health products with fixed benefits. Prudential provides these products to the broad middle income and mass affluent markets across Japan through multiple distribution channels, including banks, independent agencies and Life Consultants associated with its Gibraltar Life operations. In addition, the company also provides similar products to the mass affluent and affluent markets through its Life Planner operations in Japan, Korea and other countries outside the U.S., including Taiwan, Italy, Brazil, Argentina, Poland, and Mexico. Exhibit 14. Life Planner Pretax Operating Earnings And Margin ($ in millions)

$1,246 $1,481 $1,466 $1,592 $1,572 $721

15.2%

16.5% 16.3%

17.2% 17.1%

14.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2011 2012 2013 2014 2015 H1 2016



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Investment Portfolio Prudential maintains diversified investment portfolios in its general account to support the company’s liabilities to customers as well as other general liabilities. The primary investment objectives of Prudential Financial, Inc. excluding the Closed Block division include: (1) hedging the market risk characteristics of the major product liabilities and other obligations of the company, (2) optimizing investment income yield within risk constraints over time, and (3) for certain portfolios, optimizing total return, including both investment income yield and capital appreciation, within risk constraints over time, while managing the market risk exposures associated with the corresponding product liabilities. The primary investment objectives of the Closed Block division include: (1) providing for the reasonable dividend expectations of the participating policyholders within the Closed Block division, and (2) optimizing total return, including both investment income yield and capital appreciation, within risk constraints, while managing the market risk exposures associated with the major products in the Closed Block division. Exhibit 15. Investment Portfolio By Asset Class, 6/30/2016

38.26%

22.64%

10.66%

6.73%

5.07%

4.81%

2.51%2.47%

2.05% 1.60%

1.19% 0.86% 0.80%0.35% Securities Owned: Corporate

Debt


Mortgage Loans




Policy Loans



Source: Company data and Wells Fargo Securities, LLC Capital Profile We summarize the financial strength ratios of Prudential’s primary companies below. Exhibit 16. Financial Strength Ratings of Primary Companies

AM Best S&P Moody's Fitch

The Prudential Insurance Company of America A+ AA- A1 A+PRUCO Life Insurance Company A+ AA- A1 A+PRUCO Life Insurance Company of New Jersey A+ AA- NR A+Prudential Annuities Life Assurance Corporation A+ AA- NR A+Prudential Retirement Insurance and Annuity Company A+ AA- A1 A+The Prudential Life Insurance Co., Ltd. (Prudential of Japan) NR A+ NR NRGibraltar Life Insurance Company, Ltd. NR A+ NR NRThe Prudential Gibraltar Financial Life Insurance Co. Ltd. NR A+ NR NRPrudential Life Insurance Co. of Taiwan, Inc. NR twAA+ NR NR



106



John R. Strangfeld, Jr. Chairman, CEO & President 62 Joined Prudential in 1977 0.08

Mark B. Grier Vice Chairman 63 Joined Prudential in 1995 0.08

Charles F. Lowrey Executive VP & COO, International 58 Joined Prudential in 2001 0.00

Stephen Pelletier Executive VP & COO, U.S. 62 Joined Prudential in 1992 0.00

Robert M. Falzon Executive VP & CFO 56 Joined Prudential in 1983 0.01 Source: Company data and Wells Fargo Securities, LLC Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: Share repurchases of $2 billion, $1.5 billion and $1.5 billion for full year 2016E, 2017E, and 2018E. Consolidated operating EPS annual growth of -12% in 201616% in 2017E and 8% in 2018E. Individual Annuities pretax operating earnings growth of 6.5% in 2017E and 7.7% in 2018 Retirement pretax operating earnings growth of 8.1% in 2017E and 6.6% in 2018 Asset Management pretax operating earnings growth of 9.6% in 2017E and 3.4% in 2018E Individual Life pretax operating earnings growth of 415.4% in 2017E and 7.8% in 2018 Group Insurance operating earnings growth of -8.6% in 2017E and 21.4% in 2018E Life Planner operating earnings growth of 10.9% in 2017E and 1.2% in 2018 Gibraltar Life and Other operating earnings growth of -8.5% in 2017E and -0.4% in 2018 Corporate and Other Operations operating losses of $1.6 billion for both full year 2017E and 2018 Annualized equity market return of 8% Tax rate of 25% for both full year 2017E and 2018E.


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Exhibit 18. Prudential Financial (PRU) Income Statement Model $ Millions Except Per Share Data


OVERVIEWPretax Operating IncomeIndividual Annuities 2,085 1,467 1,797 328 427 417 385 1,556 1,657 1,785Retirement 1,039 1,215 931 219 236 229 236 919 994 1,059Asset Management 723 785 779 165 207 193 210 775 850 879

Total US Ret & Inv Mgmt 3,847 3,467 3,507 712 870 838 831 3,251 3,501 3,723Individual Life 583 498 635 120 (290) 152 119 101 521 562Group Insurance 157 23 176 26 89 54 55 225 205 249Total US Ind Life & Grp Insurance 740 521 811 146 (201) 206 175 326 726 811Life Planner 1,517 1,589 1,585 410 343 442 401 1,596 1,770 1,792Gibraltar Life & Other 1,635 1,663 1,641 369 460 397 375 1,601 1,465 1,459International Insurance 3,152 3,252 3,226 779 803 839 776 3,197 3,235 3,251Corporate and Other Operations (1,370) (1,348) (1,313) (312) (415) (394) (414) (1,535) (1,593) (1,591)Total Segment Income 6,369 5,892 6,231 1,325 1,057 1,489 1,367 5,238 5,868 6,194Taxes 1,783 1,537 1,582 328 228 372 342 1,270 1,467 1,548Tax Rate 28.0% 26.1% 25.4% 24.8% 21.6% 25.0% 25.0% 24.2% 25.0% 25.0%

Operating Income (ex. Direct Equity) 4,586 4,355 4,649 997 829 1,117 1,025 3,968 4,401 4,645Earnings allocated to share-based aw ards (43) (39) (45) (11) (9) (11) (11) (42) (40) (40)Direct Equity Adjustments 19 (10) 17 4 5 4 4 17 16 16

Adjusted Operating Income 4,562 4,306 4,621 990 825 1,110 1,018 3,943 4,377 4,621Adjusted Operating EPS 9.67 9.21 10.04 2.18 1.84 2.52 2.35 8.87 10.29 11.16

% Change 51% -5% 9% -22% -37% 5% 21% -12% 16% 8%Proforma Dil. Avg. Shares Outstanding (Mil.) 471.8 467.8 460.4 453.2 449.3 440.6 434.3 444.4 425.3 414.1Shares Repurchased 10 12 12 5.4 5.0 7.8 7.1 25 16 15

% Outstanding (Annualized) 2.1% 2.5% 2.6% 4.8% 4.4% 7.1% 6.5% 5.7% 3.8% 3.6%Dollar Repurchased / (Issued) 750 1,000 1,000 375 375 625 625 2,000 1,500 1,500End of Period Shares 468.7 461.5 453.2 448.0 444.0 437.3 431.3 431.3 419.6 408.8Dividend Per Share 1.73$ 2.17$ 2.44$ 0.70$ 0.70$ 0.70$ 0.75$ 2.85$ 3.06$ 3.31$ Ann. Payout Ratio 18% 24% 24% 0.0% 0.0% 0.0% 0.0% 32% 30% 30%Book Value (Excl. AOCI) $53.98 $54.39 $65.32 $67.36 $68.65 $69.67 $70.35 $70.35 $76.14 $82.48Book Value (Excl. AOCI w ith FX remeasurement) $59.99 $64.75 $73.59 $75.46 $76.56 $77.69 $78.49 $78.49 $84.50 $91.06Ann. Adj. Oper. ROE (Excl. AOCI) 17.6% 16.7% 16.7% 13.2% 10.9% 14.6% 13.4% 13.0% 14.0% 14.1%Ann. Adj. Oper. ROE (Excl. AOCI w ith FX remeasurement) 14.7% 14.4% 11.8% 9.7% 13.1% 12.0% 11.7% 12.6% 12.7%Book Value $72.30 $88.80 $92.43 $109.92 $124.21 $123.79 $122.91 $122.91 $130.16 $137.92Equity CalculationBeg. Common Equity 27,022 24,322 24,136 29,622 30,176 30,482 30,465 29,622 30,377 31,994Net Income to Common (713) 1,530 5,642 1,336 921 917 825 3,999 4,401 4,645Dividends (811) (1,001) (1,106) (317) (315) (308) (323) (1,229) (1,284) (1,353)Repurchases (750) (1,000) (1,000) (375) (375) (625) (625) (2,000) (1,500) (1,500)Other (425) 285 1,950 (90) 75 0 0 (15) 0 0

Ending Com. Equity (Excl. AOCI) 24,322 24,136 29,622 30,176 30,482 30,465 30,342 30,377 31,994 33,786Less: Unrealized Gains/(Losses) + OCI 8,586 15,882 12,285 19,066 24,667 23,667 22,667 22,667 22,667 22,667

Ending Com. Equity (Incl. FAS 115 + AOCI) 32,908 40,018 41,907 49,242 55,149 54,132 53,009 53,044 54,661 56,453 Average 25,672 24,229 26,879 30,000 31,186 32,890Balance Sheet Data (pg 9)General Account Assets 378,319 399,329 409,691 428,010 447,950 439,693 430,571 430,571 443,287 457,279

Total Investments 332,159 353,257 357,434 372,082 390,606 390,606 390,606 390,606 390,606 390,606 Deferred Policy Acquisition Costs 16,101 15,561 16,345 15,636 15,798 15,798 15,798 15,798 15,798 15,798Other Assets 30,059 30,511 35,912 40,292 41,546 33,289 24,167 24,167 36,883 50,875

Separate Account Assets 285,060 296,435 285,570 281,501 284,832 279,581 273,781 273,781 281,867 290,764Total Assets 663,379 695,764 695,261 709,511 732,782 719,274 704,352 704,352 725,154 748,042

xEquity 20.2x 17.4x 16.6x 14.4x 13.3x 13.3x 13.3x 13.3x 13.3x 13.3xGen Acct/Total Assets 57% 57% 59% 60% 61% 61% 61% 61% 61% 61%Sep. Acct./Total Assets 43% 43% 41% 40% 39% 39% 39% 39% 39% 39%Total Debt 5,345 8,451 5,979 5,820 5,822 5,822 5,822 5,822 5,822 5,822Separate Account Liabilities 285,060 296,435 285,570 281,501 284,832 279,581 273,781 273,781 281,867 290,764Other Liabilities 339,089 349,897 361,822 372,948 386,979 379,738 371,739 371,739 382,855 395,070Total Liabilities 629,494 654,783 653,371 660,269 677,633 665,142 651,343 651,343 670,544 691,656

Source: Company data and Wells Fargo Securities, LLC estimates


108


Prudential Financial, headquartered in Newark, New Jersey, is a leading financial services provider offering a variety of products and services including life insurance, pension and retirement-related services, asset management, and securities brokerage, among others. The Financial Services Businesses are comprised of three divisions: U.S. Retirement Solutions and Investment Management, U.S. Individual Life and Group Insurance, and International Insurance.

WELLS FARGO SECURITIES, LLC Reinsurance Group of America, Inc. EQUITY RESEARCH DEPARTMENT

109

Reinsurance Group of America, Inc. RGA: Initiating Coverage With A Market Perform Rating Summary: We are initiating coverage of RGA with a Market Perform rating

and a valuation range of $105-115. Our EPS estimates are $9.75 for 2016 and $10.00 for 2017. We like the company’s focus on mortality and morbidity underwriting but we think the risk/reward is fairly balanced at these levels given an upcoming management change and increased competition for block deals.

Results tied more to mortality and morbidity than interest rates. On an annualized basis, the company’s mortality and morbidity results are less volatile with notable exceptions (early 2000s vintage U.S. traditional mortality and Australian total and permanent disability). RGA has proven to have a competency in pricing mortality and morbidity risks on a facultative, treaty and block basis. We believe the risk-adjusted returns of these businesses should demand a higher multiple than asset-intensive businesses.

Upside from improvements in mortality from medical advances. Death claims from cancer make up 30-40% of RGA’s total claims in a typical year, and represent the leading cause of insured death as underwriting has gotten better at screening for cardiovascular disease. Using the lower end of the range, this means 30% of RGA’s book could see an increase in life expectancy of 5 years, or roughly 1.5 years for the whole book. The present value of incremental earnings from one additional year of life expectancy on the whole book is around one year’s annual premium, or about $7 billion.

Smaller U.S. mortality reinsurance market. Based on our conversations with market participants, it seems to us that cession rates have stabilized at around 27%, which are still roughly half the rates of the mid-2000s. In essence, we think primary carriers are (1) more comfortable retaining mortality risks, and (2) shifting to an earnings mix that is more weighted toward mortality underwriting. Going forward, we think the slower growth in the U.S. reinsurance market could be in part offset by the company’s geographic and product diversity.

Management change. At the end of this year, Greig Woodring, the only CEO RGA has had as a publicly-traded company, is to retire after a year’s lead time. Mr. Woodring is to be replaced by President Anna Manning. While we hesitate to use the word “visionary” when talking about life insurance, Mr. Woodring was as close as one can get, in our opinion. While we have no indication that anything is amiss, we believe there is key man risk associated with Mr. Woodring’s departure.

Q3 2016 preview. We are forecasting EPS of $2.45 versus consensus of $2.36. RGA’s results should remain relatively stable given its lower sensitivity to interest rates and equity market performance.

Valuation Range: $105.00 to $115.00 from NE to NE Our range is based on a price-to-book multiple of 1.1x applied to our Q3 2017E BVPS of $97 ex. accumulated other comprehensive income. Risks to our range include adverse mortality, credit losses, volatile FX, and falling interest rates. Investment Thesis: We rate RGA shares Market Perform. We like RGA's potential upside related to improving mortality and business rationalization by other carriers. However, we think the risk/reward is fairly balanced at these levels given a smaller reinsurance market, upcoming management change, and competition in the marketplace.

Market Perform


Market Weight



Operating EPS

Ticker RGA

Price (09/22/2016) $109.32 52-Week Range: $76-111 Shares Outstanding: (MM) 64.1 Market Cap.: (MM) $7,006.1 S&P 500: 2,178.01 Avg. Daily Vol.: 272,360 Dividend/Yield: $1.64/1.5% LT Debt: (MM) $2,788.5 LT Debt/Total Cap.: 35.0% ROE: 11.0% 3-5 Yr. Est. Growth Rate: 9.0% CY 2016 Est. P/E-to-Growth: 1.2x Last Reporting Date: 07/28/2016






110

Investment Thesis We like RGA's consistency in results and potential upside related to improving mortality and business rationalization by other carriers. However, we think the risk/reward is fairly balanced at these levels given a shrinking reinsurance market, upcoming management change, and competition in the marketplace. Valuation Our $105-115 valuation range is based on a price-to-book multiple of 1.1x applied to our estimated Q3 2017E BVPS of $97 ex. accumulated other comprehensive income. Our applied multiple is close to the three-year average of 1.12x. Risks to our range include adverse mortality, credit losses, volatile FX, and falling interest rates. Exhibit 1. RGA Price-To-Book (ex AOCI) Multiples Exhibit 2. RGA Price-To-Earnings Multiples

1.24x

Average, 1.12x

0.7x

0.8x

0.9x

1.0x

1.1x

1.2x

1.3x

Se

p-13

Dec

-13

Mar

-14

Jun

-14

Se

p-14

Dec

-14

Mar

-15

Jun

-15

Se

p-15

Dec

-15

Mar

-16

Jun

-16

Se

p-16

Pric

e to

Boo

k (e

x AO

CI)

RGA

RGA Average

11.00x

Average, 10.02x

8.0x

8.5x

9.0x

9.5x

10.0x

10.5x

11.0x

11.5x

Se

p-13

Dec

-13

Mar

-14

Jun

-14

Se

p-14

Dec

-14

Mar

-15

Jun

-15

Se

p-15

Dec

-15

Mar

-16

Jun

-16

Pric

e to

NTM

Ear

ning

s

RGA

RGA Average

Source for both: FactSet and company data Exhibit 3. 10.5% Book Value Per Share CAGR, But Run-Rate ROE Is Lower

$20.46 $22.63 $27.73

$31.08 $34.06

$38.79 $42.93 $43.58

$48.89

$56.33 $57.25

$64.95 $69.66

$78.03 $83.23

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

BVPS Ex AOCI Operating ROE



111

Investment Opportunities Results tied more to mortality and morbidity than interest rates. On an annualized basis, the company’s mortality and morbidity results are less volatile versus primary carriers with notable exceptions (early 2000s vintage U.S. traditional mortality and Australian total and permanent disability). Still, RGA has proven to have a competency in pricing mortality and morbidity risks on a facultative, treaty and block basis. We believe the risk-adjusted returns of these businesses should demand a higher multiple than asset-intensive businesses. In 2015, roughly 68% and 21% of RGA’s revenues were generated from mortality (individual and group) and morbidity (individual and group), respectively. For 2016-2018, the company looks to expand morbidity revenues by expanding group and living benefits business in select markets. Potential upside from improvements in mortality from medical advances. At the recent 2016 investor day, RGA President (and future CEO) Anna Manning pointed to death claims from cancer making up 30-40% of RGA’s total claims in a typical year, and representing the leading cause of insured death as underwriting has gotten better at screening for cardiovascular disease. Using the lower end of the given range, this means 30% of RGA’s book could see an increase in life expectancy of 5 years, or roughly 1.5 years for the whole book. According to RGA’s current CEO Greig Woodring, the present value of incremental earnings from one additional year of life expectancy on the whole book is around one year’s annual premium, or about $7 billion. Sustainable growth through acquisition of run-off blocks. As primary carriers rationalize their business models, we think RGA should be a beneficiary of trend of unloading blocks of in-force mortality business. In December 2015, the company acquired a block of U.S. term life reinsurance from XL Group plc, which covered $22 billion of life insurance in force from roughly 290,000 policies. Also, in September 2015, RGA reinsured a block of in-force term insurance policies issued by Voya, which covered $90 billion of life insurance in force from 155,000 policies written between 2008 and 2011. In addition, RGA acquired Aurora National Life Assurance Company in October 2014 from Swiss Re, which had around 82,000 policies in force and statutory policyholder liabilities of $2.7 billion. RGA is a global market leader. We expect RGA will maintain its positions as the worldwide leader in facultative reinsurance (it has received more than 6 million cases since 1979) and as a global in-force leader in life reinsurance with roughly $3 trillion of life reinsurance in force. In 2015, RGA was the market leader in U.S. life reinsurance based on new business and the #2 reinsurer based on the total size of in-force blocks. Exhibit 4. RGA Is The Market Leader In U.S. New Business ($ in millions)

Exhibit 5. RGA is #2 In U.S. In Force ($ in millions)

Company Total Total

RGA Re. Company 156,722 28.88%

SCOR Global Life 134,728 24.83%

Swiss Re 80,278 14.79%

Munich Re (US) 73,336 13.52%

Hannover Life Re 41,666 7.68%

Aurigen 19,375 3.57%

Canada Life 13,517 2.49%

General Re Life 10,037 1.85%

Optimum Re (US) 8,186 1.51%

Berkshire Hathaway Group 2,409 0.44%

Pacific Life 2,354 0.43%

TOTALS 542,615 100.0%

2015 Ordinary Reinsurance New Business (Inc. Portfolio Deals)

2015 Ordinary Reinsurance In Force

Company Total Total

SCOR Global Life 1,796,936 24%

RGA Re. Company 1,578,516 21%

Swiss Re 1,331,608 18%

Hannover Life Re 831,082 11%

Munich Re (US) 823,893 11%

Pacific Life* 238,103 3%

Canada Life 224,342 3%

Berkshire Hathaway Group 201,937 3%

Scottish Re (US) 152,586 2%

General Re Life 147,234 2%

Employers Re. Corp. 127,062 2%

Optimum Re (US) 55,287 1%

Aurigen 27,345 0%

AXA Equitable 24,499 0%RGA Re (Canada) 825 0%

TOTALS 7,561,255 100%

Source for both Exhibits: Munich American/Society of Actuaries Life Reinsurance Survey and Wells Fargo Securities, LLC


112

Investment Risks Smaller U.S. mortality reinsurance market. According to the annual Munich Re Life Reinsurance Survey, the amount of individual life business ceded to reinsurers in the U.S. fell to 26.6% in 2014, down slightly versus 27.0% in the prior year. Based on our conversations with market participants, it seems to us that cession rates have stabilized at these levels, which are still roughly half the rates of the mid-2000s. In essence, we think primary carriers are (1) more comfortable in retaining mortality risks, and (2) shifting to an earning mix that is more weighted toward mortality underwriting and less correlated to interest rates and equity market performance. Going forward, we think the slower growth in the U.S. market could still be in part offset by the company’s geographic and product diversity. Exhibit 6. 13 Consecutive Annual Declines In Ordinary Recurring New Business

Exhibit 7. Although Cession Rates Have Stabilized Around 27%, That Is Half The Rate Of the Mid-2000s

13.8%

‐3.2%‐0.6%

‐18.7%

‐14.3%

‐5.7%‐3.7%

‐9.4%

‐15.3%

‐8.7%

‐3.4%‐0.5%

‐3.8% ‐3.6%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Y-o-Y % Change in US Recurring New Business

0%

10%

20%

30%

40%

50%

60%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US

$,

Bill

ion

s

Amt.Reinsured Amt. Retained % Reinsured

Source for both Exhibits: Munich American/Society of Actuaries Life Reinsurance Survey and Wells Fargo Securities, LLC Management change. Earlier this year, longtime CFO Jack Lay retired and was replace by Todd Larson. At the end of this year, Greig Woodring, the only CEO RGA has had as a publicly-traded company, is to retire after a year’s lead time. Mr. Woodring is to be replaced by President Anna Manning. While we hesitate to use the word “visionary” when talking about life insurance, Mr. Woodring was as close as one can get, in our opinion. It is unusual for a company to have a longtime CEO and longtime CFO retire in the same year. While we have no indication that anything is amiss, we believe there is key man risk associate with Mr. Woodring’s departure. RGA faces competition in bidding on blocks of business. As U.S. flow business has slowed, RGA has become more dependent on block deals to grow premium. The company’s main competitors in life reinsurance block deals include Wilton Re, Protective Life, and some private equity companies. In 2014, Wilton Re was acquired by Canada Pension Plan Investment Board. As for Protective Life, the company was acquired by the Dai-ichi Life Insurance Company in 2015. We think the relatively lower costs of capital of the new parents will allow Wilton Re and Protective Life to use lower hurdle rates than RGA in evaluating investment projects.


113

Company Overview Reinsurance Group of America traces its roots back to General American Re, a reinsurance division created by General American Life Insurance Company in 1973. Over the years the company has grown to become a leading global provider of traditional and non-traditional life and health reinsurance, with operations in the U.S., Latin America, Canada, Europe, Africa, Asia, and Australia. RGA is the only global life reinsurance company headquartered in the U.S. The company’s world headquarters is located in St. Louis, Missouri. RGA has geographic-based and business-based operational segments: U.S. and Latin America; Canada; Europe, Middle East and Africa; Asia Pacific; and Corporate and Other. Geographic-based operations are further segmented into traditional and non-traditional businesses. The company’s segments primarily write reinsurance business that is wholly or partially retained in one or more of RGA’s reinsurance subsidiaries. Exhibit 8. Operating Earnings (Ex. Corporate) By Geography And Business, 2015

U.S. -Traditional Life Reinsurance,

25.9%

U.S. - Asset Intensive,

22.2%U.S. - Financial Reinsurance,

6.1%

Canada -Traditional,

13.8%Canada - Non Traditional,

1.6%

Europe & South Africa -

Traditional, 5.3%

Europe & South Africa - Non Traditional,

10.9%

Asia Pacific -Traditional,

11.8%

Asia Pacific -Non Traditional,

2.6%

Source: Company data and Wells Fargo Securities, LLC Summary Business Unit Discussion U.S. and Latin America Operations. The U.S. and Latin America operations represented 56.3%, 54.7% and 55.5% of RGA’s net premiums in 2015, 2014 and 2013, respectively. The U.S. and Latin America operations market traditional life and health reinsurance, reinsurance of asset-intensive products, and financial reinsurance, primarily to large U.S. life insurance companies. Exhibit 9. U.S. & LatAm - Traditional Life Reinsurance Pretax Operating Income And Margin $ in millions

Exhibit 10. U.S. & LatAm - Asset Intensive Pretax Operating Income And Margin $ in millions

$320 $371 $373 $350 $233 $166

7.1%7.6% 7.3%

6.6%

4.3%

5.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

$0

$50

$100

$150

$200

$250

$300

$350

$400

2011 2012 2013 2014 2015 H1 2016

$35 $236 $200 $251 $153 $63

15.3%17.9%

19.7%

26.1%

29.4%29.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

$0

$50

$100

$150

$200

$250

$300

2011 2012 2013 2014 2015 H1 2016



114

Exhibit 11. U.S. & LatAm - Financial Reinsurance Pretax Operating Income And Margin $ in millions

Exhibit 12. Canada Operations – Traditional Pretax Operating Income And Margin $ in millions

$26 $33 $46 $52 $55 $31

72.4% 69.8% 69.7%60.0%

74.3% 74.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

$0

$10

$20

$30

$40

$50

$60

2011 2012 2013 2014 2015 H1 2016

$143 $159 $148 $92 $124 $60

13.8% 14.3%

12.6%

8.0%

12.1%11.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Canada Operations. The Canada operations represented 10.2%, 11.2%, and 11.7% of RGA’s net premiums in 2015, 2014 and 2013, respectively. The company operates in Canada primarily through RGA Canada. RGA Canada employs its own underwriting, actuarial, claims, pricing, accounting, systems, marketing and administrative staff in offices located in Montreal and Toronto. Exhibit 13. Canada Operations - Non Traditional Pretax Operating Income And Margin $ in millions

Exhibit 14. EMEA Operations – Traditional Pretax Operating Income And Margin $ in millions

$1 $3 $1 $2 $4 $3 $3 $3 $1 $2

9.4%

38.8%

11.5%

26.0%

34.8%

27.0%29.5% 32.1%

5.5%

18.0%

0.0%

5.0%10.0%

15.0%20.0%

25.0%30.0%35.0%

40.0%45.0%

$0.0

$0.5$1.0

$1.5$2.0

$2.5$3.0$3.5

$4.0$4.5

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

$77 $62 $71 $51 $48 $6

6.2%

4.6%

5.5%

4.2% 4.0%

1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Europe, Middle East and Africa Operations. The Europe, Middle East and Africa ("EMEA") operations represented 15.1%, 15.9%, and 14.8% of RGA’s net premiums in 2015, 2014 and 2013, respectively. This segment serves clients from subsidiaries, licensed branch offices and/or representative offices primarily located in France, Germany, Ireland, Italy, the Netherlands, Poland, South Africa, Spain, the United Arab Emirates and the United Kingdom. EMEA’s operations in the U.K., continental Europe and South Africa employ their own underwriting, actuarial, claims, pricing, accounting, marketing and administration staffs with additional support services provided by the company's staff in the U.S. and Canada. Exhibit 15. EMEA Operations - Non Traditional Pretax Operating Income And Margin $ in millions

Exhibit 16. Asia Pacific – Traditional Pretax Operating Income And Margin $ in millions

$16 $35 $24 $27 $20 $31 $29 $28 25 27

27.8%

30.3%

28.8% 25.1%

34.3%

42.0% 41.9%

24.3%

37.9%34.1%

0.0%

5.0%10.0%

15.0%20.0%

25.0%30.0%35.0%

40.0%45.0%

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

$39 $37

-$218

$88$106

$762.7% 2.5%

-13.5%

5.2%6.4% 8.7%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

-$250

-$200

-$150

-$100

-$50

$0

$50

$100

$150

2011 2012 2013 2014 2015 H1 2016



115

Asia Pacific Operations. The Asia Pacific operations represented 18.3%, 18.2%, and 18.0% of the company’s net premiums in 2015, 2014 and 2013, respectively. RGA has a presence in the Asia Pacific region with licensed branch offices and/or representative offices in China, Hong Kong, India, Japan, Malaysia, New Zealand, Singapore, South Korea and Taiwan. The company has also established a reinsurance subsidiary in Australia in January 1996. Exhibit 17. Asia Pacific – Non Traditional Pretax Operating Income And Margin $ in millions

$6

$3 $3

$7

$10

$1

$6$6

$7

-$6

22.2%

21.9%

16.5%

36.3%

51.8%

7.1%

51.2%

29.5%39.3%

-53.9% -60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

-$8.0

-$6.0

-$4.0

-$2.0

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Source: Company data and Wells Fargo Securities, LLC Investment Portfolio RGA’s investment and derivative strategies involve matching the characteristics of its reinsurance products and other obligations and to seek to closely approximate the interest rate sensitivity of the assets with estimated interest rate sensitivity of the reinsurance liabilities. The company achieves its income objectives through strategic and tactical asset allocations, security and derivative strategies within an asset/liability management and disciplined risk management framework. Derivative strategies are employed within RGA’s risk management framework to help manage duration, currency, and other risks in assets and/or liabilities and to replicate the credit characteristics of certain assets. Exhibit 18. Investment Portfolio By Asset Class, 6/30/2016

37.16%

14.63%13.95%

8.88%

7.22%

4.60%

4.29%3.09%

2.21%1.36% 1.29%0.76% 0.42%

0.13% Securities Owned: CorporateDebt


Other Investments


Mortgage Loans



Policy Loans




116

Capital Profile We summarize the financial strength ratios of RGA’s primary companies below. Exhibit 19. Financial Strength Ratings of Primary Companies


RGA Americas Reinsurance Co. Ltd. -AA- (OS)Initiate5/22/2014

-A+Affirm6/10/2016

RGA Global Reinsurance Co. Ltd. -AA- (OS)Affirm11/21/2006

- -

RGA International Reinsurance Co. DAC -AA- (OS)Affirm11/21/2006

- -

RGA Life Reinsurance Co. of Canada -AA- (OS)Affirm11/21/2006

- -

RGA Reinsurance Co. A1 (OS)Affirm5/26/2015


A (OS)Downgrade7/1/2016

A+Affirm6/10/2016

RGA Reinsurance Co. of Australia Ltd. -AA- (OS)SNL Start11/22/2011

- -



Albert Greig Woodring CEO 64 Only CEO RGA has had 0.28

Anna Manning President, CEO-deisgnee 57 Joined in 2007 0.01

Todd Cory Larson Senior Executive VP & CFO 52 Joined in 1995 0.00

Donna Haag Kinnaird Senior EVP & COO 64 Joined in 2012 0.00

Source: Company data and Wells Fargo Securities, LLC Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: Share repurchases of $216 million, $200 million and $200 million for full year 2016E, 2017E, and 2018E. Consolidated operating EPS annual growth of 2.6% in 2017E and 10.0% in 2018E U.S. - Traditional Life Reinsurance pretax operating income growth of 2.0% in 2017E and 8.7% in 2018E U.S. - Asset Intensive pretax operating income growth of -0.2% in 2017E and 8.3% in 2018E U.S. - Financial Reinsurance pretax operating income growth of -3.0% in 2017E and 6.6% in 2018E Canada – Traditional pretax operating income growth of -1.1% in 2017E and -9.4% in 2018E Canada - Non Traditional pretax operating income growth of 15.6% in 2017E and 5.4% in 2018E Total International Operations pretax operating income growth of -2.7% in 2017E and 4.7% in 2018E Corporate and Other operating losses of $57 million for full year 2017E and $58 million for 2018E Annualized equity market return of 8% Tax rate of 34.0% for both full year 2017E and 2018E.


117

Exhibit 21. Renaissance Group of America (RGA) Income Statement Model $ Millions Except Per Share Data


OVERVIEWPretaxOperatingIncomeExRealizedGainsLossesU.S. - Traditional Life Reinsurance 373 350 233 53 112 75 85 325 332 361U.S. - Asset Intensive 166 199 200 45 54 48 48 195 195 211U.S. - Financial Reinsurance 46 52 55 16 15 12 14 57 55 59

Total U.S. Operations 584 602 488 114 182 134 147 577 582 631Canada - Traditional 148 92 124 19 41 35 41 136 135 122Canada - Non Traditional 0 6 14 1 2 4 4 10 12 12Europe & South Africa - Traditional 71 51 48 (1) 7 17 18 41 48 48Europe & South Africa - Non Traditional 0 85 98 26 26 31 32 115 119 123Asia Pacific - Traditional (218) 88 106 41 34 25 21 122 88 115Asia Pacific - Non Traditional 0 19 23 7 (6) 7 7 15 26 27Total International Operations 0 342 412 93 104 118 124 439 427 447Corporate and Other Operations (40) (1) (52) (30) (13) (13) (13) (69) (57) (58)

Total Consolidated Pre-Tax Operating Income 545 942 848 177 273 240 258 948 952 1,019Taxes 186 304 281 56 92 81 88 317 324 347Tax Rate 34.2% 32.3% 33.1% 31.8% 33.7% 34.0% 34.0% 33.5% 34.0% 34.0%

Operating Income 358 638 567 121 181 158 170 630 629 673% Change -30.6% 78.0% -11.1% -0.8% 39.1% 24.4% -9.5% 11.1% -0.3% 7.0%

Operating EPS $4.95 $9.12 $8.43 $1.85 $2.80 $2.45 $2.66 $9.75 $10.00 $11.00% Change -29.0% 84.4% -7.6% 4.8% 44.1% 28.9% -6.4% 15.7% 2.6% 10.0%

Reported Operating EPS $4.95 $9.12 $8.43 $1.85 $2.80 $2.45 $2.66 $9.75 $10.00 $11.00FX contribution $0.12 $0.16 $0.53 $0.10 $0.06 $0.00 $0.00 $0.16 $0.00 $0.00Net Effect of One-Time Negative / (Positive) Items $2.53 ($0.96) ($0.22) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Comparable EPS $7.60 $8.32 $8.74 $1.95 $2.86 $2.45 $2.66 $9.91 $10.00 $11.00Share Count Data:Weighted Avg. Basic Shares 71.9 69.3 66.6 64.6 64.1 63.8 63.3 64.0 62.1 60.4 Weighted Avg. Dilution 0.5 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7

Weighted Avg. Diluted Shares 72.5 70.0 67.3 65.2 64.8 64.6 64.0 64.7 62.9 61.2Beginning Period Shares Outstanding 73.9 70.8 68.8 65.2 64.1 64.1 63.6 65.2 63.1 61.3Share Buybacks (4.2) (2.5) (3.9) (1.2) (0.1) (0.5) (0.5) (2.3) (1.8) (1.6)Other (7.4) (4.5) 2.7 0.1 0.1 0.0 0.0 0.2 0.0 0.0End of Period Shares 70.8 68.8 65.2 64.1 64.1 63.6 63.1 63.1 61.3 59.6Number of shares repurchased 4.2 2.5 3.9 1.2 0.1 0.5 0.5 2.3 1.8 1.6Dollar value 261 198 380 105 11 50 50 216 200 200Average price 62.08 78.07 97.94 87.50 91.67 96.25 101.06 92.54 110.87 124.78

Dividend and Payout Data:Dividend Per Share 1.08$ 1.26$ 1.36$ 0.37$ 0.37$ 0.41$ 0.41$ 1.56$ 1.74$ 2.00$ Ann. Payout Ratio 21.8% 13.8% 16.1% 20.0% 13.2% 16.7% 15.4% 16.0% 17.4% 18.2%

Book Value and ROE Data:Book Value Per Share $83.87 $102.13 $94.09 $104.88 $118.32 $120.61 $123.08 $123.08 $132.07 $141.67

Book Value (Excl. AOCI) $69.66 $78.03 $83.23 $84.11 $87.33 $89.37 $91.60 $91.60 $99.66 $108.39Ann. Oper. ROE (Excl. AOCI) 7.4% 12.5% 10.6% 8.9% 13.2% 11.2% 11.9% 11.3% 10.6% 10.7%Equity Calculation:Beg. Common Equity (Excl. AOCI) 4,801 4,930 5,366 5,427 5,388 5,595 5,679 5,427 5,776 6,104

Net Income to Common 419 675 495 76 236 160 173 645 638 683

Dividends (78) (88) (91) (24) (24) (26) (26) (101) (109) (122)

Repurchases (261) (198) (380) (105) (11) (50) (50) (216) (200) (200)

Proceeds from Capital Raising Transactions 0 0 0 0 0 0 0 0 0 0

Other 49 47 38 15 6 0 0 21 0 0

Ending Com. Equity (Excl.AOCI) 4,930 5,366 5,427 5,388 5,595 5,679 5,776 5,776 6,104 6,465

Less: AOCI 1,006 1,657 708 1,330 1,985 1,985 1,985 1,985 1,985 1,985

Ending Com. Equity (Incl. AOCI) 5,936 7,023 6,135 6,719 7,581 7,665 7,761 7,761 8,090 8,450

Abbreviated Balance SheetTotal Investments 32,441 36,696 41,978 43,490 45,761 46,676 47,610 47,610 51,534 55,782

Other Assets 6,310 6,338 6,880 7,194 7,082 6,764 6,515 6,515 4,926 3,242

Total Assets 39,674 44,680 50,383 52,187 53,877 54,474 55,159 55,159 57,495 60,059




AOCI 1,006 1,657 708 1,330 1,985 1,985 1,985 1,985 1,985 1,985

Total Shareholder's Equity 5,936 7,023 6,135 6,719 7,581 7,665 7,761 7,761 8,090 8,450 Source: Company data and Wells Fargo Securities, LLC estimates


118


Reinsurance Group of America, Inc. is a leader in the global life reinsurance industry headquartered in Chesterfield, Missouri. RGA serves clients from 27 offices around the world, delivering solutions in life reinsurance, facultative underwriting, risk management, product development, and capital-motivated reinsurance services. In the U.S., the company is the leading facultative underwriter.

WELLS FARGO SECURITIES, LLC Unum Group EQUITY RESEARCH DEPARTMENT

119

Unum Group UNM: Initiating Coverage With A Market Perform Rating Summary. We are initiating coverage of Unum Group with a Market Perform

rating and a $36-38 valuation range. Our 2016 EPS estimate is $3.85 and our 2017 EPS estimate $4.05. We think UNM’s focus on mortality and morbidity underwriting is a positive in an environment with continued low interest rates and volatile equities. However, we feel the stock’s risk/reward is balanced in the near term due to the company’s closed blocks of LTC policies and higher exposure to below investment grade (IG) and energy investments.

Closed blocks of LTC policies. Unum’s legacy discontinued blocks of long-term care (LTC) business continue to be a potential drag on earnings and free cash flow. Returns on equity of these books remain low single-digit. To reflect lower interest rates and updated lapse rate, mortality and morbidity assumptions, the company increased its LTC reserves by 574 million and 698 million in 2011 and 2014, respectively. While UNM continues to raise rate for its in-force blocks, if interest rates stay lower for longer, we think it is just a matter of time (possibly Q4 2017) for UNM to take another large charge to boost its LTC reserves.

Higher exposure to below IG and energy investments. Compared to peers, the company has a relatively higher exposure to below investment grade (roughly 10% of its fixed income portfolio) and energy investments (around 12% of its fixed income portfolio; 67% of which related oil and gas). Historically Unum’s investment portfolio has provided a stable source of income with manageable impairments. Still, this could change if impairment rises due to normalization of credit costs or much lower oil prices.

Consistent results and cash flow generation. Given Unum’s focus on mortality and morbidity underwriting, the company’s operating results tend to be more stable versus peers that are more relied on spread and fee income. Operating EPS and book value per share ex. AOCI have grown consistently since 2008 at CAGRs in excess of 5% and 8%, respectively. Aided by solid capital generation, Unum has also increased its dividends at a CAGR of 12.9% in the last seven years and repurchased cumulatively more than 35% of float.

Growth supported by low penetration and an improving economy. We expect to see continued business growth in Unum largely driven by: (1) under penetration in U.S. small businesses, (2) growing participation in high deductible medical plans, (3) low penetration in supplemental and voluntary products, and UK group income protection coverage, (4) disappearing access to protection for the middle class, and (5) an improving U.S. economy (albeit slowly) with higher employment rates, payroll growth, and wage inflation.


Valuation Range: $36.00 to $38.00 from NE to NE Our valuation range is based on a 0.9x multiple on our Q3 2017E BVPS ex. AOCI of $41. Risks to our valuation range include investment spread compression, a weak employment market, and credit losses in particular related to energy. Investment Thesis: We rate UNM shares Market Perform. We like UNM's focus on mortality and morbidity underwriting but we think the risk/reward is balanced at these levels due to UNM's closed block of LTC policies and higher exposure to below IG bonds.

Market Perform


Market Weight



Operating EPS

Ticker UNM







120

Investment Thesis We think UNM’s focus on mortality and morbidity underwriting should allow the company to outperform peers in an environment with continued low interest rates and volatile equities. However, we feel the stock’s risk/reward is balanced in the near term due to the company’s closed blocks of legacy policies and higher exposure to below IG and energy investments. Valuation Our $36-38 valuation range is based on a 0.9x multiple on our forward twelve-month estimate of BVPS ex. AOCI of $41.05. We believe using a price-to-book multiple one standard deviation below the three-year average is justified given the overhang from the closed block long-term care business. Risks to our valuation range include investment spread compression, a weak employment market, and credit losses in particular related to energy. Exhibit 1. UNM Price-To-Book (ex AOCI) Multiples Exhibit 2. UNM Price-To-Earnings Multiples


0.7x

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Source: Company data, FactSet and Wells Fargo Securities, LLC Investment Opportunities Consistent results and cash flow generation. Given Unum’s focus on mortality and morbidity underwriting, the company’s operating results tend to be more stable versus peers that are more relied on spread and fee income. Operating EPS and book value per share ex. AOCI have grown consistently since 2008 at CAGRs in excess of 5% and 8%, respectively. Aided by solid capital generation, Unum has also increased its dividends at a CAGR of 12.9% in the last seven years and repurchased cumulatively more than 35% of float. Growth supported by low penetration and an improving economy. We expect to see continued business growth in Unum largely driven by: (1) under penetration in U.S. small businesses, (2) growing participation in high deductible medical plans, (3) low penetration in supplemental and voluntary products, and UK group income protection coverage, (4) disappearing access to protection for the middle class, and (5) an improving U.S. economy (albeit slowly) with higher employment rates, payroll growth, and wage inflation. Investment Risks Closed blocks of legacy policies. Unum’s legacy discontinued blocks of long-term care (LTC) business continue to be a potential drag on earnings and free cash flow. Returns on equity of these books remain low single-digit. To reflect lower interest rates and updated lapse rate, mortality and morbidity assumptions, the company increased its LTC reserves by 574 million and 698 million in 2011 and 2014, respectively. While UNM continues to raise rate for its in-force blocks, if interest rates stay lower for longer, we think it is just a matter of time (possibly Q4 2017) for UNM to take another large charge to boost its LTC reserves. Unum lowered its discount rate assumption again in Q4 2014 to reflect the low interest rate environment and the company’s revised expectation of future investment portfolio yield rates. Unum’s revised assumptions were set at a level that the company estimated would be sustainable in a low interest rate environment persisting for the next three to five years, with a return to more historical averages over the following five year period. Since that time, however, interest rates have continued to drift lower while credit spreads have also tightened. As a result, if interest rates remain low by Q4 2017 (as projected by our economists), we think the company might


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have to increase its reserves to reflect the lower interest rates. Still, the net impact to reserves will also depend on the emerging experience related to termination, utilization, morbidity and mortality. Exhibit 3. UNM’s Increases In Long-Term Care Reserves

TimeIncrease In Reserves ($MM)

LTC Reserves At The End Of Period ($B)

Rationale 10-Yr Treasury Yield At The End of Period

Q4 2011 $574 $5.4 Lower discount rate, lower termination, higher utilization, and updated mortality and morbidity assumptions 1.88%

Q4 2014 $698 $6.1 Lower discount rate, lower termination, higher utilization, and updated mortality and morbidity assumptions 2.11%

Q4 2017E ? ? Lower discount rate and ? 1.73% Source: Company data and Wells Fargo Securities, LLC estimates Higher exposure to below IG and energy investments. Compared to peers, the company has a relatively higher exposure to below investment grade (roughly 10% of its fixed income portfolio) and energy investments (around 12% of its fixed income portfolio; 67% of which related oil and gas). Historically Unum’s investment portfolio has provided a stable source of income with manageable impairments. Still, this could change if impairment rises due to normalization of credit costs or much lower oil prices. Sensitivity to economic conditions. Unfavorable economic conditions could lead to lower sales, lower premium growth and persistency, higher claims incidence, and longer claims duration, which may adversely affect Unum’s results and profitability. In an economic environment with higher unemployment, lower personal income, reduced consumer spending, and lower corporate earnings and investment, the company’s new product sales could be adversely affected. In addition, UNM’s premium growth could also be negatively impacted by lower premium growth from existing customers from lower salary growth and lower growth in the number of employees covered under an existing policy. Further, during such periods the company may experience an increase in claims incidence, longer claims duration, and/or higher policy lapses, any of which could have a material adverse effect on UNM’s results and profitability. Company Overview Unum Group’s earliest predecessor, Union Mutual Life, was chartered in Maine and headquartered in Boston in 1848. The first policy was issued the following year for $5,000 in life insurance. In 1999, the merger of Unum Corporation and The Provident Companies created UnumProvident Corporation, which was renamed to Unum Group in 2007. Unum Group is now based in Chattanooga, Tennessee, with insurance and non-insurance subsidiaries in the U.S., the U.K., and certain other countries providing a complementary portfolio of other insurance products, including employer- and employee-paid group benefits, life insurance, and other related services. Unum is the largest disability insurer in both the U.S. (for group and individual disability) and the U.K (for group disability). The company has three principal operating business segments: Unum US, Unum UK, and Colonial Life. The other segments are the Closed Block and Corporate segments. Exhibit 4. Operating Earnings (Ex. Corporate) By Segment, 2015

Unum US, 59.9%

Unum UK, 9.9%

Colonial, 21.8%

Closed Block, 8.4%



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Summary Business Unit Discussion Unum U.S. The Unum U.S. segment includes group long-term and short-term disability insurance, group life and accidental death and dismemberment products, and supplemental and voluntary lines of business. Unum sells group long-term and short-term disability products to employers for the benefit of employees. Group long-term disability provides employees with insurance coverage for loss of income in the event of extended work absences due to sickness or injury. Unum also offers services to employers and insureds to encourage and facilitate rehabilitation, retraining, and re-employment. Group short-term disability insurance generally provides coverage from loss of income due to injury or sickness, effective immediately for accidents and after one week for sickness, for up to 26 weeks, limited to specified maximums as a percentage of income. Exhibit 5. Group Disability Pretax Operating Income And Margin On Revenues ($ in millions)

Exhibit 6. Group Life and AD&D Pretax Operating Income And Margin On Revenues ($ in millions)

$302 $293 $296 $275 $272 $145

14.9% 14.3% 14.3%13.0%

12.1% 12.3%

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2011 2012 2013 2014 2015 H1 2016

$209 $221 $269 $240 $225 $112

15.4% 15.3%

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2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Group life and accidental death and dismemberment products are sold to employers as employee benefit products. Group life consists primarily of renewable term life insurance with the coverages frequently linked to employees' wages and includes a provision for waiver of premium, if disabled. Accidental death and dismemberment consists primarily of an additional benefit amount payable if death or severe injury is attributable to an accident. The supplemental and voluntary lines of business are comprised of individual disability and voluntary benefits products. Individual disability products are offered primarily to multi-life employer groups to supplement their group disability plans and may be funded by the employer, but the policy is owned by the employee and is portable. Individual disability insurance provides the insured with a portion of earned income lost as a result of sickness or injury. Voluntary benefits products are primarily sold to groups of employees through payroll deduction at the workplace and include life, disability, accident, hospital indemnity, cancer, and critical illness offered on both a group and individual basis. Exhibit 7. Supplemental & Voluntary Pretax Operating Income And Margin On Revenues ($ in millions)

Exhibit 8. Unum UK Pretax Operating Income And Margin On Revenues ($ in millions)

$306 $333 $294 $330 $353 $186

23.8%

24.5%

21.4%

23.3%23.7% 23.8%

19.5%20.0%20.5%21.0%21.5%22.0%22.5%23.0%23.5%24.0%24.5%25.0%

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$191 $131 $132 $148 $141 $71

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Source for both Exhibits: Company data and Wells Fargo Securities, LLC Unum UK. The Unum UK segment includes insurance for group long-term disability, group life, and supplemental lines of business which include dental, individual disability, and critical illness products. Group long-term disability products are sold to employers for the benefit of employees. Group long-term disability provides employees with insurance coverage for loss of income in the event of extended work absences due to sickness or injury. Services are offered to employers and insureds to encourage and facilitate rehabilitation, retraining, and re-employment.


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Group life products are sold to employers as employee benefit products. Group life consists of two types of products, a renewable term life insurance product and a group dependent life product. Profitability of group life is affected by persistency, investment returns, claims experience, and the level of administrative expenses. Supplemental products are sold to individual retail customers as well as groups of employees and include individual disability, group and individual critical illness, and group dental. Individual disability products provide the insured with a portion of earned income lost as a result of sickness or injury. Critical illness products provide a lump-sum benefit on the occurrence of a covered critical illness event. Group dental products generally provide fixed benefits based on specified treatments or a portion of the cost of the treatment. Colonial Life. The Colonial Life segment includes insurance for accident, sickness, and disability products, life products, and cancer and critical illness products issued primarily by Colonial Life & Accident Insurance Company and marketed to employees, on both a group and an individual basis, at the workplace through an independent contractor agency sales force and brokers. The accident, sickness, and disability product line consists of short-term disability plans as well as accident-only plans providing benefits for injuries on a specified loss basis. It also includes accident, health, and dental plans covering hospital admissions, confinement, surgeries, and dental services on an indemnity basis. Life products are primarily comprised of universal life, whole life, and term life policies. Cancer policies provide various benefits for the treatment of cancer including hospitalization, surgery, radiation, and chemotherapy. Critical illness policies provide a lump-sum benefit and/or fixed payments on the occurrence of a covered critical illness event. Exhibit 9. Colonial Life Pretax Operating Income And Margin On Revenues ($ in millions)

Exhibit 10. Closed Block Pretax Operating Income And Margin On Revenues ($ in millions)

$270 $274 $264 $299 $309 $155

21.3%

20.6%

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2011 2012 2013 2014 2015 H1 2016

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2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Closed Block Segment. The Closed Block segment consists of individual disability, group and individual long-term care, and other insurance products no longer actively marketed. Closed Block segment premium income for 2015 comprised roughly 50% individual disability and 50% group and individual long-term care.


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Investment Portfolio Unum segments its invested assets into portfolios that support the company’s various product lines. Generally, Unum’s investment strategy for its portfolios is to match the effective asset cash flows and durations with related expected liability cash flows and durations to consistently meet the liability funding requirements of our businesses. The company seeks to earn investment income while assuming credit risk in a prudent and selective manner, subject to constraints of quality, liquidity, diversification, and regulatory considerations. The overall investment philosophy is to invest in a portfolio of high quality assets that provide investment returns consistent with that assumed in the pricing of Unum’s insurance products. Assets are invested predominately in fixed maturity securities. Exhibit 11. Investment Portfolio By Asset Class, 6/30/2016

56.65%

15.80%

6.23%

4.65%

4.31%

3.65%2.89%

2.64% 1.90% 1.11% 0.18%0.00% Securities Owned: Corporate

Debt


Policy Loans



Mortgage Loans






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Capital Profile We summarize the financial strength ratios of Unum’s primary companies below. Exhibit 12. Financial Strength Ratings of Primary Companies


Colonial Life & Accident Insurance Co. A2 (OS)Affirm11/5/2015

A (OS)Upgrade10/9/2012

A (OS)Affirm4/29/2016

AAffirm3/1/2016

First Unum Life Insurance Co. A2 (OS)Affirm11/5/2015



AAffirm3/1/2016

Paul Revere Life Insurance Co. A2 (OS)Affirm11/5/2015



AAffirm3/1/2016

Provident Life & Accident Insurance Co. A2 (OS)Affirm11/5/2015



AAffirm3/1/2016

Provident Life & Casualty Insurance Co. A2 (OS)Affirm11/5/2015



AAffirm3/1/2016

Starmount Life Insurance Co. - - Remove3/23/2009

A-Upgrade8/5/2016

Unum Insurance Co. A2 (OS)Affirm11/5/2015

Remove12/31/2002


B++Affirm3/1/2016

Unum Life Insurance Co. of America A2 (OS)Affirm11/5/2015



AAffirm3/1/2016

Unum Ltd. -A- (OS)Upgrade7/17/2008

- -



Richard Paul "Rick" McKenney President & CEO 47 Joined in 2009 0.06

John Francis "Jack" McGarry Executive VP & CFO 58 Joined in 1986; an actuary 0.02

Michael Q. Simonds President and CEO, Unum US 42 Joined in 1994 0.00

Peter O’Donnell President and CEO, Unum UK 49 Joined in 2010 as CFO 0.00

Tim Arnold President and CEO, Colonial Life 53 Joined in 1984 0.00

Source: Company data and Wells Fargo Securities, LLC Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: Share repurchases of $400 million, $400 million and $500 million for full year 2016E, 2017E, and 2018E. Consolidated operating EPS annual growth of 6% in 2016E, 5% in 2017E and 4.9% in 2018E. Unum US pretax operating earnings growth of 3.1% in 2016, 1.8% in 2017E and -1.1% in 2018. Unum UK pretax operating earnings growth of -6.0% in 2016E, -8.0% in 2017E and 2.9% in 2018E. Colonial Life pretax operating earnings growth of 2.0% in 2016E, 3.2% in 2017E and 3.3% in 2018E. Closed block pretax operating earnings growth of 12.8% in 2016E, 7.9% in 2017E and -5.0% in 2018E. Tax rate of 31.1% in 2016 and 31.5% for both full year 2017E and 2018E.


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Exhibit 14. Unum Group (UNM) Income Statement Model $ Millions Except Per Share Data


OVERVIEW

Pretax Operating Income by SegmentGroup Disability 295.7 274.8 272.4 70.4 74.2 67.2 65.0 276.7 288.7 269.4

Group Life and AD&D 232.6 240.4 224.9 55.4 56.9 58.4 61.0 231.7 244.7 256.0

Supplemental & Voluntary 320.5 329.7 352.7 90.1 95.9 88.9 93.1 368.0 359.1 357.2

Total Unum US 848.8 844.9 850.0 215.9 227.0 214.5 219.0 876.4 892.4 882.6Unum UK 132.0 147.8 140.6 33.6 36.9 32.5 29.1 132.2 121.6 125.2

Colonial 283.6 299.0 309.1 77.4 77.9 79.9 80.1 315.3 325.4 336.2

Closed Block 107.3 120.0 119.1 33.7 32.6 31.1 37.0 134.3 144.9 137.6

Corporate & Other (115.1) (104.4) (124.8) (31.8) (35.7) (32.4) (35.0) (134.9) (142.9) (139.1)

Corporate (old) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Pretax Operating Income 1,256.6 1,307.3 1,294.0 328.8 338.7 325.5 330.3 1,323.3 1,341.4 1,342.6Taxes 382.9 407.2 393.0 102.0 103.0 102.7 104.2 411.9 422.5 422.9

Tax Rate 30.5% 31.1% 30.4% 31.0% 30.4% 31.5% 31.5% 31.1% 31.5% 31.5%

Operating Income 873.7 900.1 901.0 226.8 235.7 222.8 226.1 911.4 918.9 919.7

Operating Earnings Per Share $3.28 $3.51 $3.64 $0.95 $0.99 $0.95 $0.97 $3.85 $4.05 $4.25 % change 4.3% 6.8% 3.6% 6.1% 11.2% 4.5% 2.6% 6.0% 5.0% 4.9%

Weighted Avg. Diluted Shares Outstanding 266.0 256.5 247.9 239.9 237.3 235.5 233.0 236.4 227.0 216.6Reconciliation to Unadjusted Operating Income / NIP-T Operating Income, unadjusted 1,256.6 1,307.3 1,294.0 328.8 338.7 325.5 330.3 1,323.3 1,341.4 1,342.6

Pre-tax unadjusted operating Income 1,256.6 1,307.3 1,294.0 328.8 338.7 325.5 330.3 1,323.3 1,341.4 1,342.6

Tax on operating income (382.9) (407.2) (393.0) (102.0) (103.0) (102.7) (104.2) (411.9) (422.5) (422.9)

Unadjusted operating income 873.7 900.1 901.0 226.8 235.7 222.8 226.1 911.4 918.9 919.7

Net Realized Gains/Losses (3.7) 2.9 (34.8) (13.6) (13.6) (10.0) (10.0) (47.2) (40.0) (40.0)

Net Income 895.8 903.0 866.2 210.6 219.5 212.8 216.1 864.2 878.9 879.7

Net EPS $3.37 $3.52 $3.49 $0.88 $0.92 $0.90 $0.93 $3.66 $3.87 $4.06

Dividend Per Share $0.55 $0.63 $0.71 $0.19 $1.19 $0.22 $0.22 $1.80 $0.90 $0.98

Operating Payout Ratio 16.7% 17.8% 19.4% 19.6% 119.3% 22.7% 22.2% 46.7% 22.2% 23.1%

Book Value (Excl. AOCI ) $32.25 $33.12 $35.90 $36.68 $37.52 $38.21 $38.91 $38.91 $41.77 $44.63Book Value Per Share (GAAP) $33.23 $33.78 $35.96 $37.53 $38.97 $39.67 $40.38 $40.38 $43.31 $46.24

BV Incl. AOCI/BV Excl. AOCI 103% 102% 100% 102% 104% 104% 104% 104% 104% 104%

Ann. Oper. ROE 10.7% 10.6% 10.6% 10.4% 10.8% 10.1% 10.1% 10.4% 10.1% 9.9%

Balance Sheet DataTotal Assets 59,374 62,450 60,564 61,968 63,853 63,932 64,407 64,407 66,384 67,590

Invested Assets / Total Assets 82.3% 82.9% 82.6% 82.7% 83.2% 81.0% 81.0% 81.0% 81.0% 81.0%

Total Assets / Equity 7.08 7.47 7.00 7.11 7.24 7.20 7.20 7.20 7.20 7.20

Ann. NII/Avg. Invested Assets 5.2% 4.9% 5.0% 4.79% 4.78% 4.66% 4.89% 4.9% 4.8% 4.7%

Goodw ill and VBA/Equity 2.3% 2.3% 2.7% 2.6% 2.5% 2.5% 2.4% 2.4% 2.4% 2.3%


Shareholder's Equity 8,640 8,522 8,664 8,920 9,157 9,219 9,285 9,285 9,560 9,727

Equity CalculationBeginning Common Equity 7,985 8,385 8,356 8,648 8,720 8,817 8,879 8,648 8,945 9,220

Net Income 837 833 817 211 219 213 216 859 879 880

Dividends (146) (160) (175) (44) (281) (51) (50) (426) (204) (212)

Other (Debt Payments/Share Repurchase) (291) (702) (350) (94) 159 (100) (100) (135) (400) (500)

Ending Common Equity (Excl. AOCI) 8,385 8,356 8,648 8,720 8,817 8,879 8,945 8,945 9,220 9,388

Add Back: AOCI 255 166 16 201 340 340 340 340 340 340

Ending Common Equity (Incl. FAS 115) 8,640 8,522 8,664 8,920 9,157 9,219 9,285 9,285 9,560 9,727

Average Equity, Ex FAS 115 8,160 8,526 8,490 8,684 8,768 8,848 8,912 8,803 9,084 9,273

Equity Excluding Goodw ill and VBA 8,184 8,157 8,417 8,490 8,591 8,653 8,719 8,719 8,993 9,161 Source: Company data and Wells Fargo Securities, LLC estimates Company Description:

Unum Group, headquartered in Chattanooga, Tennessee, is a leading employee benefits firm that covers more than 181,000 businesses and 33 million people in the U.S. and the U.K. The company (formerly known as UnumProvident) was formed in June 1999 following the merger of Unum Corporation, the market leader in group disability income products, with Provident Companies, the largest writer of individual disability insurance. The three largest businesses consist of Unum US, Unum UK and Colonial Life.

WELLS FARGO SECURITIES, LLC Voya Financial, Inc. EQUITY RESEARCH DEPARTMENT

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Voya Financial, Inc. VOYA: Resuming Coverage With A Market Perform Rating Summary: We are resuming coverage on Voya Financial with a change in

analyst, a Market Perform rating and a valuation range of $30-$32 per share. Our EPS estimates are $3.07 for 2016 and $3.71 for 2017. While we believe Voya’s ongoing retirement- and investment-oriented business mix should command a higher valuation multiple, the company’s legacy business should continue to suppress the company’s overall valuation given much lower interest rates.

Think sum-of-the-parts. To gauge the intrinsic value of the stock, we use a proprietary SOTP framework, which ascribes specific values to each of these four components: (1) operating earnings (ongoing plus corporate and closed blocks), (2) tax benefits, (3) closed block of variable annuities (CBVA), and (4) excess capital. Our analysis points to an implied combined market valuation of about $30-32 per share, which is driven by the earnings power of Voya’s ongoing business.

Multi-year ROE and ROC expansion plan for ongoing business. Despite VOYA’s greater than average earnings contribution from investment services businesses, the company’s return on equity still falls below peers. As VOYA continues on its plan to improve business margins, reduce operating costs and actively manage capital, we would anticipate further improvement in the company’s return on equity (ROE). The company is now looking toward achieving an ROE in the range of 13.5-14.5% from its ongoing businesses by 2018.

Excess capital for deployment. Voya’s excess capital was around $775 million at the end of Q2, which included the estimated statutory surplus and $272 million of excess liquidity at the holding companies. Coupled with the dividend capacity from ongoing business, we think Voya has ample flexibility for capital deployment through 2018. Given the compressed valuation of its shares, we think buybacks should remain the preferred avenue for excess capital deployment.

Closed block variable annuity in a lower for longer scenario. The company presented an additional scenario in its Q2 recent earnings call, which provided some color on how a lower for longer rate scenario would impact the CBVA segment. To us, the biggest concern related to CBVA is whether the block would require capital infusion at some point given much lower interest rates.

Q3 preview. We are forecasting EPS of $0.84 versus consensus of $0.81. Our Q3 EPS estimate reflects the impact related to a stronger-than-expected equity market performance and lower interest rates in the quarter. VOYA historically performs its annual actuarial review in Q3. If the company lowers its long term risk-free assumption by another 25 bps to 4.50%, we think there could be a related charge of around $0.25 per share in the quarter.

Valuation Range: $30.00 to $32.00 from NE to NE Our range is based on our SOTP analysis, which ascribes specific values to operating earnings ($29-31), tax benefits ($4), CBVA (-$4), and excess capital ($1). Risks to our range include exposure to CBVA, differentiated reporting, competition in the Retirement market, spread compression, and liquidity. Investment Thesis: We rate VOYA shares Market Perform. We believe the company's ongoing, retirement- and investment-oriented business mix warrants a premium relative to peers that have a higher reliance on spread-based income. However, we think Voya's legacy businesses will continue to suppress the company's overall valuation.

Market Perform


Market Weight



FY 2015 EPS impacted by timing of share repurchase.

Ticker VOYA


Before OpenSource: Company Data, Wells Fargo Securities, LLC estimates, and Reuters





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Investment Thesis We rate the shares of Voya Market Perform. We believe the company’s ongoing, retirement- and investment-oriented business mix warrants a premium relative to peers that have a higher reliance on spread-based income. However, we think Voya’s legacy businesses will continue to suppress the company’s overall valuation. Valuation Our valuation range is based on our sum-of-the-parts (SOTP) analysis, which ascribes specific values to each of these four components: (1) operating earnings (ongoing plus corporate and closed blocks), (2) tax benefits, (3) closed block of variable annuities, and (4) excess capital. Our analysis points to an implied combined market valuation of $30-$32 per share, which includes: (1) roughly $29-31 per share based on 2016/2017E operating earnings, (2) around $4 per share associated with the company’s deferred tax assets (DTA) and dividend received deduction (DRD), (3) roughly -$4 per share from VOYA’s closed block of variable annuities, and (4) around $1 per share from excess capital above our assumptions for share repurchases and common dividends through 2018. Exhibit 1. Sum-Of-The-Parts Valuation For Operating Earnings ($ in millions, except per share data)

($ in millions, except per share data) ($ in millions, except per share data)

After-tax Operating Earnings After-tax Operating Earnings

Retirement 356.8$ 1.77$ 9.3 x 16.6$ Retirement 362.2$ 2.00$ 8.4 x 16.7$

Annuities 159.4 0.79 8.5 x 6.7 Annuities 150.7 0.83$ 7.2 x 6.0

Investment Management 97.7 0.49 11.7 x 5.7 Investment Management 130.4 0.72$ 10.5 x 7.6

Indiv idual Life 135.7 0.67 8.7 x 5.8 Indiv idual Life 130.8 0.72$ 7.4 x 5.4

Employee Benefits 82.5 0.41 9.1 x 3.7 Employee Benefits 98.2 0.54$ 8.2 x 4.5

Closed Blocks 6.1 0.03 9.0 x 0.3 Closed Blocks 0.0 -$ 9.0 x -

Corporate (220.8) (1.10) 9.3 x (10.2) Corporate (200.3) (1.11)$ 8.3 x (9.2)

Total 617.4$ 3.07$ 9.3 x 28.6$ Total 672.1$ 3.71$ 8.3 x 30.9$

Implied Valuation Per Share On Operating Income 29$ Implied Valuation Per Share On Operating Income 31$

*Estimated Wtd. Avg. Shares Outstanding, 2016 (millions) 201.3 *Estimated Wtd. Avg. Shares Outstanding, 2017 (millions) 181.0

2017E Per

Share*

Average

P/E

Multiple

Implied

Valuation

Per Share

Average

P/E

Multiple

Implied

Valuation

Per Share

Per

Share*

2016E

Notes: 1. Retirement Comps: LNC, PFG, and PRU 2. Annuities Comps: LNC and MET 3. Investment Management Comps: AMG, BEN, BLK, CLMS, CNS, FII, GBL, JNS, LM, TROW, and WDR 4. Individual Life Comps: LNC, MET, and PRU 5. Employee Benefits Comps: PRU and UNM Source: Company data, FactSet, and Wells Fargo Securities, LLC estimates


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Exhibit 2. VOYA’s Price-To-Book (ex AOCI) Multiples Exhibit 3. VOYA’s Price-To-Earnings Multiples

0.49x

Average, 0.75x

0.3x

0.4x

0.5x

0.6x

0.7x

0.8x

0.9x

1.0xS

ep

-13

Dec

-13

Mar

-14

Jun

-14

Se

p-1

4

Dec

-14

Mar

-15

Jun

-15

Se

p-1

5

Dec

-15

Mar

-16

Jun

-16

Se

p-1

6

Pric

e to

Boo

k (e

x AO

CI)

VOYA

VOYA Average

8.00x

Average, 11.40x

7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

15.0x

Se

p-13

Dec

-13

Mar

-14

Jun

-14

Se

p-14

Dec

-14

Mar

-15

Jun

-15

Se

p-15

Dec

-15

Mar

-16

Jun

-16

Pric

e to

NTM

Ear

ning

s

VOYA

VOYA Average

Source: Company data, FactSet, and Wells Fargo Securities, LLC Investment Opportunities Multi-year ROE and ROC expansion plan. Despite VOYA’s greater than average earnings contribution from investment services businesses, the company’s return on equity still falls below peers. As VOYA continues on its plan to improve business margins, reduce operating costs and actively manage capital, we would anticipate further improvement in the company’s return on equity (ROE). After achieving its prior goal two years ahead of schedule, the company is now looking toward achieving an ROE in the range of 13.5-14.5% from its ongoing businesses (Retirement Solutions, Investment Management and Insurance Solutions) by 2018. For VOYA’s ongoing business segments, the company has focused on improving operating return on capital (ROC), which is a measure of operating results relative to the capital supporting each segment. The TTM ongoing business operating ROC decreased to 9.6% in Q2 2016, versus 10.0% in 2015 and 9.9% in 2011, in part attributed to alternative income coming in below the company’s long-term expectation. VOYA is looking to achieve an ROC in the range of 11.5-12.5% by 2016. To this end, the company has identified over twenty strategic initiatives across business segments, which are expected to drive net improvement in ROC of roughly 150-250 bps by 2018, including 150-180 bps from growth initiatives, 50-80 bps from margin initiatives, 40-60 bps from capital initiatives. As part of the company’s efforts to reach its ongoing business operating ROC goal, VOYA has also set operating targets for each of its segments to achieve by 2018. While most segments’ improvements are to be measured in ROC, the Investment Management segment’s progress is to be based on pre-tax operating margin. Exhibit 4. VOYA’s Ongoing Operating ROC Goal by Segment

2015 TTM Q2 2016 2018 Target

Retirement 8.7% 8.3% 11% - 12%Annuities 9.3% 8.9% 9.5% - 10.5%Investment Management Pre-tax Operating Margin 29.2% 24.8% 33% - 35%Employee Benefits 26.5% 22.3% 23% - 25%Individual Life 7.0% 7.0% 7.5% - 8.5%ROC (Unlevered Ongoing Business) 10.0% 9.6% 11.5% - 12.5%ROE (Ongoing Business) 12.1% 11.5% 13.5% - 14.5%

Operating ROCs

Note: Investment Management target based on pre-tax operating margin range. Source: Company data and Wells Fargo Securities, LLC


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Organic growth. The company’s organic initiatives are to be the greatest contributor in achieving the overall ongoing business operating ROC goal, and are expected to add 150-180 basis points to ongoing ROC over the period from 2015 to 2018. These growth initiatives include: (1) In Retirement, expand advisor distribution and market reach to generate higher sales, increase sales force

productivity to win more mandates, and Retain profitable clients

(2) In Annuities, expand product line, grow less capital-intensive investment only products, and expand fixed index annuity (FIA) distribution to growing institutional markets

(3) In Investment Management, develop new distribution and markets, introduce new products and solutions, and enhance productivity

(4) In Employee Benefits, expand into mid-market, grow private exchange participation and voluntary sales, and increase the growth of in-force premium

Margin expansion. The company’s margin initiatives are expected to add 50-80 basis points to ongoing ROC over the period from 2015 to 2018. These margin initiatives include: (1) In Retirement, simplify and consolidate IT platforms, streamline operations through process digitization,

and continue managing in-force block

(2) In Annuities, continue managing crediting rates/investment spread, and continue running off Annual Reset/Multi-Year Guarantee Annuity block

(3) In Individual Life, restore profit margins within the in-force block, and reduce redundant reserve financing cost

Capital management. VOYA anticipates the capital initiatives to contribute additional 40-60 basis points to ongoing business operating ROC over the period from 2015 to 2018. Some of the capital initiatives include: (1) In Individual Life, reduce capital usage. While still subject to regulatory approval, the recently announced

restructuring of existing redundant reserve financing at lower terms is expected to generate a 150-200 bps improvement in ROC (75% of benefit expected to be realized in 2017)

(2) Reinsurance transactions – additional reinsurance and XXX/AG38 reserve financing facilities for Individual Life and the Hannover Re block to free up capital from redundant reserves, which are expected to peak in 2017-2020 and 2016, respectively

Excess capital for deployment. VOYA’s combined risk-based capital (RBC) ratio was 461% at the end of Q2, down sequentially from 491% (would have been 511% excluding dividends of $701 million), but well above the company’s 425% target. There was still roughly $503 million of statutory surplus in excess of VOYA’s 425% target risk-based capital (RBC) level. Excess capital was around $775 million at the end of Q2, which included the estimated statutory surplus as well as $272 million of excess liquidity at the holding companies. VOYA repurchased $487 million of shares year-to-date in 2016 (including the $150 million share repurchase agreement). Coupled with the dividend capacity from the company’s ongoing business, we think Voya has ample flexibility for capital deployment through 2018. Given the compressed valuation of its shares, we think share repurchase should remain Voya’s preferred avenue for excess capital deployment in the near term.


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Investment Risks Closed block of variable annuities. Prior to 2008, VOYA was a leader in the variable annuity business. Since the financial crisis, the performance of this book of business has required substantial reserve and capital additions as well as suffered from intangible write-offs. At present, the company’s variable annuity block (CBVA) is in run-off and closed to new business. Even though VOYA no longer actively markets retail variable annuities, the company’s business results, financial condition as well as liquidity will continue to be affected by the closed block in the near term, in our view. The CBVA segment is currently managed to focus on protecting regulatory and rating agency capital. Economic exposures of the closed block associated with equity markets and interest rates are hedged by the guarantee hedge program (a dynamic delta hedge) and interest rate hedging, while regulatory reserves and rating agency capital risks are further managed by the capital hedge overlay (CHO) program. Earlier this year, VOYA offered up the present values (PV) of cash flows as of year-end 2015 for the CBVA segment under different scenarios. According to the company, pre-tax cash flows are projected over 50 years reflecting obligation of guaranteed benefits, and are independent of any accounting regime. In addition, cash flows are discounted at swap rates, with PV equals (1) available capital resources less PV of benefits payments, plus (2) PV of fees net of expenses and (3) PV of hedge gains or losses. The company presented an additional scenario in its Q2 recent earnings call, which provided some color on how a lower for longer rate scenario would impact the CBVA segment. Still, with limited public information available on the CBVA segment, we don’t think accurate modeling of cash flows for the closed block of variable annuities is possible. To us, the biggest concern related to CBVA is whether the block would require capital infusion at some point given much lower interest rates. With estimated available resources of $6.8 billion and statutory reserves of $5.9 billion, this implies CBVA would still have excess capital in the 1% low rate stress scenario. Exhibit 5. Present Value of Cash Flows for CBVA Under Different Scenarios ($ in billions)

Scenario Assumptions PV of Cash Flows as of Year-End 2015

Scenario 1 Equity return down 25% in first year, then 0% thereafter; long term interest rates constant; lapses down 5% ($1.4)

1% Low Rate Stress Scenario 5% Equity returns; interest rates remain flat at 1% over forecast period ($0.8)

Scenario 2 5% Equity returns; Interest rates follow forward curve; current dynamic policyholder behavior assumptions $1.1

Scenario 3 9% Equity returns; Interest rates follow forward curve; current dynamic policyholder behavior assumptions $2.0

Scenario 4 9% Equity returns; Interest rates graded to long-term assumption; current dynamic policyholder behavior assumptions $2.8

Source: Company data and Wells Fargo Securities, LLC Spread compression. Investment spread and other investment income represented roughly 41% of Voya’s ongoing business sources of income at June 30, 2016. The low interest rate environment remains a challenge to VOYA in balancing market share and profitability of its spread-based products due to lower investment earnings and reinvestment risks. For Individual Life, to combat spread compression the company has repriced in-force and renewals, as well as shifted its product mix from spread-dependent, guarantee-type products to more fee-dependent, indexed-and accumulation-type products. The mix-shift is evident as the company has stopped selling secondary guarantee universal life products as well as 25-year and 30-year term life products and expanded its presence in indexed universal life and accumulation universal life products. Indexed universal life accounted for roughly 86% of total sales in Q2 2016. For Annuities, the company has maintained pricing discipline in the low interest rate environment, shifted its business mix to fixed index annuities and less capital-intensive investment only products and managed its run-off fixed block of business (multi-year guarantee annuities or MYGA). In addition, the company is still managing its institutional spread products portfolio (guaranteed investment contracts and funding agreements) that were placed in run-off in 2009.


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Exhibit 6. VOYA Estimated General Account Spreads

2011 2012 2013 2014 2015 Q1 2016 Q2 2016

Annuities 1.3% 1.7% 2.0% 2.0% 2.1% 2.0% 2.2%Individual Life 1.9% 1.5% 1.6% 1.4% 1.7% 1.5% 1.6%

Source: Company data and Wells Fargo Securities, LLC estimates Reduction in employment levels. The underlying employee participation levels, contributions, deposits and premium income for some of Voya’s retirement products could decrease if there are reductions in employment levels of company’s existing employer customers. In addition, the assets under management or administration and the company’s revenue could also decrease due to retirement plan participants making withdrawals from their plans, or reducing or stopping their payroll deferrals. Company Overview Voya Financial is a global financial institution that offers banking, retirement, insurance and investment management services. Formerly known as VOYA, the company is the consolidated result of multiple acquisitions executed over many years. Voya offers products and services primarily in the U.S., with a focus on retirement, investment management and insurance. In addition, the company utilizes multiple distribution channels, including financial intermediaries, independent producers, affiliated advisors, and dedicated sales specialists. As of year-end 2015, VOYA had an employee force of roughly 7,000 and a combined individual and institutional customer base of around 13 million in the U.S. Voya operates its principal businesses through three business lines: Retirement Solutions, Investment Management and Insurance Solutions. The company refers to these business lines as the “ongoing business.” In addition, Voya has Closed Blocks and Corporate reporting segments. The Closed Blocks segment comprises two businesses that are currently placed in run-off: Closed Block Variable Annuity, and Closed Block Other. The Corporate segment includes corporate activities and corporate-level assets and financial obligations Summary Business Unit Discussion Retirement Solutions. The Retirement Solutions business represents 65% of VOYA ongoing business operating earnings at June 30, 2016 and provides products and services through two financial reporting segments, Retirement and Annuities. The primary sources of revenues are asset and participant-based advisory and record-keeping fees, as well as some fee-based and spread-based income from annuities. The Retirement segment comprises of two businesses, Institutional Retirement Plans and Retail Wealth Management and represents 43% of VOYA ongoing business operating earnings at June 30, 2016. The Institutional Retirement Plans business offers tax-deferred employer-sponsored retirement savings plan and administrative services to small-mid corporations, large corporations, public and private school systems, higher education institutions, state and local governments, hospitals and healthcare facilities and not-for-profit organizations. The company also offers stable value products and pension risk transfer solutions to institutional plan sponsors. The Retail Wealth Management business offers retail financial products and comprehensive advisory services to help individuals manage their retirement savings and income needs. Current products and services include advisory programs, mutual fund custodial IRAs, fixed annuities, and brokerage accounts. The Institutional Retirement Plans business can be further categorized into two markets, Corporate (primarily small- and mid-sized corporations and a small percentage of large- and mega-sized corporations) and Tax Exempt (including educational entities, hospitals, healthcare organizations and state and local government). Products for Institutional Retirement Plans are distributed through both unaffiliated channels (independent sales agents, wirehouses, independent producers and third party administrators) and affiliated distribution channels (including ING Financial Partners and direct sales teams). Pension risk transfer solutions are offered to institutional plan sponsors looking to transfer their defined benefit plan obligations to VOYA. The company entered this market in 2014, and believes it offers a growth opportunity that is aligned with its expertise in servicing institutional group annuity plans and individual plan participants. Products for Retail Wealth Management are sold through an affiliated distribution group of representatives (both field-based and home office phone-based) as well as direct marketing online via websites.


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Exhibit 7. Retirement Pre-tax Operating Earnings And Return On Capital ($ in millions)

Exhibit 8. Annuities Pre-tax Operating Earnings And Return On Capital ($ in millions)

$442 $449 $596 $518 $471 $232

6.1%7.1%

8.9% 9.1% 8.7%8.0%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%

$0

$100

$200

$300

$400

$500

$600

$700

2011 2012 2013 2014 2015 H1 2016

$388 $102 $294 $262 $243 $101

3.3%

5.9%

7.2%

9.0% 9.3%8.4%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC The Annuities segment provides fixed and indexed annuities, tax-qualified mutual fund custodial products and payout annuities for pre-retirement wealth accumulation and post retirement income management. This segment represents 22% of VOYA ongoing business operating earnings at June 30, 2016. Annuity products are distributed by independent marketing organizations, independent broker-dealers, banks, independent insurance agents, pension professionals and affiliated broker-dealers. Mutual fund custodial products are distributed through independent brokers, financial planners, and agents. Investment Management. The Investment Management business serves both individual and institutional customers (including public/corporate/union retirement plans, endowments and foundations and insurance companies), offering domestic and international fixed income, equity, multi-asset and alternative investment products and solutions. The primary sources of revenues are management fees collected on the assets the company manages (AUM). The Investment Management segment represents 10% of ongoing business operating earnings at June 30, 2016. The segment had roughly $204.0 billion in AUM ($71.0 billion Investment Management sourced, $54.3 billion affiliate sourced and $78.7 billion in the general account) and $49.0 billion in assets under administration (AUA) as of June 30, 2016. The company is focused on growing its commercial business, which comprises both institutional and retail lines. Products and services are distributed through VOYA direct sales force, consultant channel and intermediary partners including banks, broker-dealers and independent financial advisers. In terms of competitors, the Investment Management segment faces intense competition from insurance-owned asset managers (Principal Global Investors, Prudential, and Ameriprise), bank-owned asset managers (including J.P. Morgan Asset Management) and “pure-play” asset managers (including PIMCO, Invesco, Wellington, Legg Mason, T. Rowe Price, Franklin Templeton and Fidelity). Exhibit 9. Investment Management Pre-tax Operating Earnings And Margin ($ in millions)

Exhibit 10. Employee Benefits Pre-tax Operating Earnings And Return On Capital ($ in millions)

$88 $132 $176 $210 $182 $55

16.5%18.7%

24.7%

30.0% 29.1%26.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

$0

$50

$100

$150

$200

$250

2011 2012 2013 2014 2015 H1 2016

$83 $109 $106 $149 $146 $57

13.2%

16.9% 18.7%

28.8% 26.4% 29.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

$0

$20

$40

$60

$80

$100

$120

$140

$160

2011 2012 2013 2014 2015 H1 2016

Source for both Exhibits: Company data and Wells Fargo Securities, LLC Insurance Solutions. The Insurance Solutions business comprises two segments, Individual Life and Employee Benefits. The Individual Life segment provides wealth protection and transfer opportunities through universal life, variable life, whole life and term life products and represents 15% of VOYA’s ongoing business operating earnings at the end of Q2 2016. The Employee Benefits segment provides stop loss, group life, voluntary employee paid, and disability products to mid-sized and large businesses and represents 10% of ongoing business operating earnings at June 30, 2016. The Individual Life segment generates revenue from premiums, investment income, expense load, mortality charges and other policy charges, along with asset-


134

based fees. The primary sources of revenues for Employee Benefits are premiums, investment income, mortality and morbidity income, as well as policy and other charges. Individual Life products are distributed through independent general agent channel that interact with licensed independent life insurance agents in the U.S., strategic distribution channel (network of independent managing directors supporting a team of producers who work with VOYA broker dealers) and specialty markets channel (banks, life insurance quote agencies and internet direct marketers). Employee Benefits products are distributed through brokers, consultants, and third-party administrators. The Individual Life segment competes with other life insurance companies including Lincoln Financial Group, MetLife, Prudential Financial, American General, Principal Financial Group, John Hancock, Transamerica and Pacific Life. Within Employee Benefits, competitors in the group life business include MetLife, Prudential Financial, and Minnesota Life. Competitors in the stop loss business include Houston Casualty, Symetra and Sun Life. Competitors in the voluntary business include Unum, Allstate and Transamerica. Exhibit 11. Individual Life Pre-tax Operating Earnings And Margin ($ in millions)

$279 $196 $255 $237 $173 $103

7.9%

4.3%4.8%

5.2%6.1%

6.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

$0

$50

$100

$150

$200

$250

$300

2011 2012 2013 2014 2015 H1 2016

Source: Company data and Wells Fargo Securities, LLC Closed Blocks of Businesses. Closed Blocks are excluded from the company’s ongoing business, and comprise three separate reporting segments that are no longer actively marketed or sold by the company: variable annuity, a guaranteed investment certificate (GIC) and funding agreement spread lending business that is in run-off, as well as continuing obligations and assets connected with the group reinsurance and individual reinsurance businesses the company sold between 2004 and 2009. In 2009, VOYA made the decision to stop actively writing new retail variable annuity products with substantial guarantee features, as well as to run-off the institutional spread products portfolio over time. Total AUM at June 30, 2016 for variable annuity was roughly $37.6 billion. The Closed Block Variable Annuity (CBVA) segment consists of variable annuity contracts that were designed to offer long-term savings products to policyholders. The Closed Block Other segment is largely comprised of previously issued GICs and funding agreements, retained and run-off activity related to divestments (group reinsurance and individual reinsurance businesses), broker dealers and Life Insurance Company of Georgia. The CBVA segment represents the bulk of the closed blocks of businesses. Many of the variable annuity policies written include living benefit riders (guaranteed minimum withdrawal benefit for life, investment benefit , accumulation benefit, withdrawal benefit [GMWBL, GMIB, GMAB and GMWB]) and all deferred variable annuity contracts include GMDB. The closed block is hedged dynamically to protect regulatory and rating agency capital against adverse market movements (equity, interest rate, currency, and volatility). However, non-market risks including policyholder behavior are not hedged. At the end of Q2 2016, VOYA held estimated available resources of $6.8 billion, including statutory reserves of $5.9 billion. Living benefit net amount at risk was $7.2 billion. The company’s hedge program focuses on protecting statutory and ratings agency capital from market movements. In addition, Voya continues to look for opportunities to accelerate the run-off of the block of business.


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Investment Portfolio Segmented portfolios are established for groups of products with similar liability characteristics. Voya’s investment portfolio consists largely of high quality fixed maturities and short-term investments, investments in commercial mortgage loans, alternative investments and other instruments, including a small amount of equity holdings. Fixed maturities include publicly issued corporate bonds, government bonds, privately placed notes and bonds, bonds issued by states and municipalities, asset backed securities (ABS), traditional mortgage backed security (MBS) and various collateralized mortgage obligation (CMO) tranches managed in combination with financial derivatives as part of a proprietary strategy known as CMO-B. The company’s investment strategy seeks to achieve sustainable risk-adjusted returns by focusing on principal preservation, disciplined matching of asset characteristics with liability requirements and the diversification of risks. Investment activities are undertaken according to investment policy statements that contain internally established guidelines and risk tolerances and are required to comply with applicable laws and insurance regulations. Risk tolerances are established for credit risk, credit spread risk, market risk, liquidity risk and concentration risk across issuers, sectors and asset types that seek to mitigate the impact of cash flow variability arising from these risks. Voya also uses derivatives for hedging purposes to reduce its exposure to the cash flow variability of assets and liabilities, interest rate risk, credit risk and market risk. In addition, the company uses credit derivatives to replicate exposure to individual securities or pools of securities as a means of achieving credit exposure similar to bonds of the underlying issuer(s) more efficiently. Exhibit 12. Investment Portfolio By Asset Class, 6/30/2016

55.78%

11.97%

10.87%

4.24%

3.86%2.94%

2.77% 2.53% 1.94% Securities Owned: CorporateDebt


Mortgage Loans



Other Investments

Investment in Partnerships


Policy Loans



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Capital Profile We summarize the financial strength ratios of Voya’s primary companies below. Exhibit 13. Financial Strength Ratings of Primary Companies

Moody's S&P AM Best Fitch

Midwestern United Life Insurance Co. -A (OS)Upgrade2/17/2015

-A-Affirm8/18/2015

ReliaStar Life Insurance Co. A2 (OS)Upgrade3/3/2015



AAffirm8/18/2015

ReliaStar Life Insurance Co. of New York A2 (OS)Upgrade3/3/2015



AAffirm8/18/2015

Security Life of Denver Insurance Co. A2 (OS)Upgrade3/3/2015



AAffirm8/18/2015

Voya Insurance and Annuity Co. A2 (OS)Upgrade3/3/2015



AAffirm8/18/2015

Voya Retirement Insurance and Annuity Co. A2 (OS)Upgrade3/3/2015



AAffirm8/18/2015


Name Position Approximate

Age Background Ownership (% of O/S)

Rodney Owen Martin Jr. Chairman & CEO 64 Joined in 2011 0.03

Alain Maurice Karaoglan EVP, COO & CEO, RIS Business 53 Joined in 2011 0.02

Ewout Lucien Steenbergen Executive VP & CFO 46 Joined ING in 1993; became Voya CFO in 2010 0.00

Source: Company data and Wells Fargo Securities, LLC Summary Financial Model Our EPS estimates for 2016, 2017 and 2018 are based on the following key assumptions: Share repurchase of $657 million, $700 million and $700 million for full year 2016E, 2017E, and 2018E. Consolidated ongoing business pre-tax margins of 33.3% in 2017E and 33.7% in 2018E. Retirement pre-tax operating earnings growth of 1.5% in 2017E and 6.1% in 2018E Annuities pre-tax operating earnings growth of -5.4% in 2017E and 3.3% in 2018E Investment Management pre-tax operating earnings growth of 33.6% in 2017E and 6.1% in 2018E Individual Life pre-tax operating earnings growth of -3.6% in 2017E and 1.7% in 2018E Employee Benefits pre-tax operating earnings growth of 19.0% in 2017E and 11.4% in 2018E Other Closed Block pre-tax operating earnings of $0 million in both 2017E and 2018E Corporate pre-tax operating losses of $294.6 million in 2017E and $294.6 million in 2018E Annualized equity market return of 8% Operating tax rate of 32%


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Exhibit 15. Voya Financial (VOYA) Income Statement Model ($ in millions, except per share data)

Fiscal Year Ends December 31

2013 2014 2015 Q1 2016 Q2 2016 Q3 2016E Q4 2016E 2016E 2017E 2018E

SUMMARYPRE-TAX OPERATING INCOME BY SEGMENTRetirement 595.8 517.8 470.7 103.7 140.5 137.8 142.7 524.7 532.7 565.4

Annuities 293.8 262.0 243.0 50.7 72.6 56.2 54.9 234.4 221.6 229.0

Investment Management 178.1 210.3 181.9 22.7 31.8 41.7 47.3 143.6 191.8 203.5

Individual Life 254.8 237.3 172.8 41.1 50.3 50.8 57.3 199.5 192.4 195.7

Employee Benefits 106.1 148.9 146.0 20.8 32.2 35.5 32.7 121.3 144.4 160.8

Total Ongoing Business, pre-tax 1,428.5 1,376.3 1,214.4 239.0 327.4 322.1 334.9 1,223.4 1,282.9 1,354.4 Corporate (210.6) (170.4) (259.2) (73.0) (94.3) (78.6) (78.6) (324.6) (294.6) (294.6)

Closed Blocks 50.6 24.7 22.4 3.8 1.9 1.6 1.6 8.9 - -

Total Operating income, pre-tax 1,268.5 1,230.6 977.6 169.8 235.0 245.0 257.9 907.7 988.3 1,059.8 Taxes 444.3 430.7 312.7 54.3 75.1 78.4 82.5 290.4 316.3 339.1

Operating Effective Tax rate 35.0% 35.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0%

Total Operating income, after-tax 824.3 799.9 664.9 115.5 159.9 166.6 175.4 617.4 672.1 720.7

Operating Earnings Per Share $3.27 $3.14 $2.92 $0.55 $0.79 $0.84 $0.91 $3.07 $3.71 $4.47Year/Year 26% -4% -7% -33% 1% 101% 0% 5% 21% 20%

Number of shares repurchased (millions) 0.0 21.4 34.3 7.6 3.7 5.1 5.0 21.3 20.7 19.1

Total repurchased ($ millions) 0.0 790.1 1,490.3 220.3 116.7 160.0 160.0 657.0 700.0 700.0

Weighted average fully diluted shares outstanding 251.8 255.1 227.5 209.1 203.5 198.8 193.7 201.3 181.0 161.1

BELOW OPERATING INCOME LINE, AFTER-TAXClosed Block Variable Annuity, after-tax (785.8) (158.1) (117.9) 31.3 38.4 (38.3) (42.0) (10.7) (175.9) (188.5)

Net realized investment gains (losses), after-tax 137.8 139.8 (56.7) (41.1) (16.8) 3.0 3.0 (51.8) 12.2 12.2

Other, after-tax 316.3 (263.3) (92.8) 58.4 (77.4) (24.6) (24.6) (68.2) (98.3) (98.3)

Actual tax (expense) benefit compared to tax (expense) benefit at statutory rate 298.1 2,020.3 136.9 28.2 31.9 50.2 52.6 162.9 193.0 209.9

Net income (loss) 790.7 2,538.7 534.5 192.3 136.0 157.0 164.4 649.6 603.0 655.9

Net Income Per Share $2.39 $9.02 $1.78 $0.92 $0.79 $0.79 $0.85 $3.35 $3.33 $4.07

Book Value Per ShareExcluding AOCI $43.65 $53.76 $57.44 $58.75 $59.44 $60.96 $62.56 $62.56 $69.43 $77.76Including AOCI $50.72 $66.59 $64.26 $70.89 $76.62 $78.58 $80.65 $80.65 $89.72 $100.64

Ongoing Business ROC 8.7% 10.0% 10.2% 7.8% 10.1% 10.6% 10.9% 9.8% 10.2% 10.5%ROC - Retirement 8.9% 9.1% 8.7% 7.0% 8.9% 9.5% 9.8% 8.8% 9.0% 9.4%

ROC - Annuities 7.2% 9.0% 9.3% 7.1% 10.0% 9.8% 9.4% 9.0% 9.0% 8.6%

ROC - Investment Management 38.4% 44.1% 37.6% 19.8% 29.1% 38.5% 42.6% 32.4% 40.6% 39.1%

Operating Margin - Investment Management 29.3% 32.1% 29.2% 17.2% 22.3% 27.2% 29.7% 24.4% 29.6% 30.2%

ROC - Individual Life 4.8% 5.2% 6.1% 6.5% 7.1% 6.6% 7.3% 6.9% 6.0% 5.9%

ROC - Employee Benefits 18.7% 28.8% 26.4% 16.1% 24.1% 25.3% 23.3% 22.2% 25.8% 29.0%

Ongoing Business ROE 10.4% 12.1% 12.3% 9.1% 12.2% 12.8% 13.3% 11.8% 12.3% 12.7%

Dividend Per Share $0.02 $0.04 $0.04 $0.01 $0.01 $0.01 $0.01 $0.04 $0.20 $0.20Dividend payout ratio 0.0% 0.0% 0.4% 5.2% 3.2% 22.2% -8.1% 2.3% 1.2% 6.0%

Debt to capital 20.9% 17.9% 20.6% 19.3% 18.8% 18.8% 18.8% 18.8% 18.9% 19.0%

Debt to capital (ex AOCI) 23.5% 21.3% 22.5% 22.4% 23.0% 23.0% 23.0% 23.0% 23.2% 23.3%

BALANCE SHEETTotal assets 221,023 226,951 230,728 214,008 217,065 218,142 218,175 218,175 216,409 215,401

Total investments 87,051 90,834 88,492 92,988 95,639 95,982 95,997 95,997 95,220 94,777

Deferred policy acquisition costs/VOBA 5,352 4,571 5,370 4,693 4,264 4,363 4,363 4,363 4,328 4,308

Assets held in separate accounts 106,827 106,008 96,515 95,775 96,307 95,982 95,997 95,997 95,220 94,777

Total liabilities 205,509 208,428 201,974 198,305 200,700 204,508 204,539 204,539 202,884 201,939

Long-term debt 3,515 3,516 3,486 3,456 3,548 3,548 3,548 3,548 3,548 3,548

Total shareholder's equity 15,514 18,523 16,276 15,702 16,366 16,361 16,363 16,363 16,231 16,155 Total shareholder's equity ex. AOCI 13,665 15,420 14,851 13,226 12,926 12,921 12,923 12,923 12,791 12,715 Source: Company data and Wells Fargo Securities, LLC estimates Company Description:

Voya Financial, headquartered in New York City, is a leading provider of products and services in retirement savings, investment income and protection. The company primarily focuses on providing retirement products and services to small, mid, large and mega-sized employers in the 401(k), 403(b) and 457 market segments, and is among the nation's largest providers of 401(k) plans and a leader in the small-mid corporate and education retirement plan markets. Voya also offers individual life and employee benefits.


138

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Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue. STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL

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41% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Outperform.

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Wells Fargo Securities, LLC has provided investment banking services for 6% of its Equity Research Underperform-rated companies.


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SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

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Diane Schumaker-Krieg Global Head of Research, Economics & Strategy │ 212-214-5070 / 704-410-1801

[email protected]

Sam J. Pearlstein

Co-Head of Equity Research │ 212-214-5054 [email protected]

Paul Jeanne, CFA, CPA

Associate Director of Research 443-263-6534 / 212-214-8054 / 704-410-2130

[email protected]

Todd M. Wickwire Co-Head of Equity Research

410-625-6393 / 212-214-5069 [email protected]

Lisa Hausner

Global Head of Publishing │ 443-263-6522 [email protected]

CONSUMER Beverage/Convenience Stores/Tobacco

Bonnie Herzog 212-214-5051 Adam Scott 212-214-8064 Patty Kanada, CFA 212-214-5029

Cosmetics, Household & Personal Care Joe Lachky, CFA 314-875-2042 Zachary Fadem, CPA 212-214-8018

Sam Reid 212-214-4915 Food

John Baumgartner, CFA 212-214-5015 Leisure

Timothy Conder, CPA 314-875-2041 Karen Tan 314-875-2556 Marc J. Torrente 314-875-2557 Lyn Walther 443-263-6422

Restaurants & Foodservice Jeff Farmer, CFA 617-603-4314

Retail Ike Boruchow 212-214-8024 Tom Nikic 212-214-8030

Nancy Hilliker 212-214-5017 Lauren Frasch 212-214-5024

ENERGY Exploration & Production

David R. Tameron 303-863-6891 Gordon Douthat, CFA 303-863-6920

Mark A. Engelmeyer 303-863-4754 Jay M. Mondrick, CFA 303-863-5859 Chris M. Baker, CFA 303 863-6816 Daniel Norman 303-863-6880

Master Limited Partnerships Michael J. Blum 212-214-5037 Sharon Lui, CPA 212-214-5035 Praneeth Satish 212-214-8056

Eric Shiu 212-214-5038 Ned Baramov, CFA 212-214-8021 Nicholas Daly 212-214-8012 Zachary Cantor 212-214-5050

Utilities Neil Kalton, CFA 314-875-2051 Sarah Akers, CFA 314-875-2040 Glen F. Pruitt 314-875-2047

Jonathan Reeder 314-875-2052 Peter Flynn 314-875-2049

Oilfield Services and Equipment Judson E. Bailey, CFA 713-577-2514 Coleman W. Sullivan, CFA 713-577-2510

Christopher Voie, CFA 713-577-2515 Nick Ohmstede 713-577-2516 Blake Doerr 713-576-1017

International E&Ps/Independent Refiners Roger D. Read 713-577-2542

Lauren Hendrix 713-577-2543

FINANCIAL SERVICES BDCs

Jonathan Bock, CFA 704-410-1874 Finian P. O’Shea 704-410-1990 Joseph Mazzoli, CFA 704-410-2523 Jamie Sirockman 704-410-2197

Brokers/Exchanges/Asset Managers Christopher Harris, CFA 443-263-6513

Robert Ryan, CFA 212-214-5025 Zachary Feierstein, CPA 443-263-6526

Insurance Elyse Greenspan, CFA 212-214-8031

Kenneth Hung, CFA, ASA 212-214-8023 Rashmi H. Patel, CFA 212-214-8034

Specialty Finance Joel J. Houck, CFA 443-263-6521 Vivek Agrawal 443-263-6563

Charles Nabhan 443-263-6578 Max Maier 443-263-6573

U.S. Banks Matt H. Burnell 212-214-5030 Jason Harbes, CFA 212-214-8068 Jared Shaw 212-214-8028

Timur Braziler 212-214-5048

HEALTH CARE Biotechnology

Jim Birchenough, MD 415-947-5470 Chuck Whitesell 212-214-5067 Nick Abbott 206-542-2492 Yanan Zhu 415-396-3194

Healthcare Facilities Gary Lieberman, CFA 212-214-8013

Ryan Halsted 212-214-8022 Michael Lasky 212-214-8069

Digital Health Jamie Stockton, CFA 901-425-5301 Stephen Lynch 901-425-5375

Nathan Weissman 901-425-5397 Life Science Tools, Services, & Diagnostics

Tim Evans 212-214-8010 Sara Silverman 212-214-8027

Managed Care/Ancillary Benefits Peter H. Costa 617-603-4222

Polly Sung, CFA 617-603-4324 Brian Fitzgerald, CFA 617-603-4277

Medical Technology Larry Biegelsen 212-214-8015 Craig W. Bijou 212-214-8038

Lei Huang 212-214-8039 Adam C. Maeder 212-214-8042

Specialty Pharmaceuticals David Maris 212-214-8026

Katie Brennan 212-214-8060 Patrick Trucchio, CFA 212-214-5064

INDUSTRIAL Aerospace & Defense

Sam J. Pearlstein 212-214-5054 Gary S. Liebowitz, CFA 212-214-5055

Ronald Hou 212-214-5056 Automotive/Electrical and Industrial Products

Rich Kwas, CFA 410-625-6370 David H. Lim 443-263-6565

Deepa Raghavan, CFA 443-263-6517 Ronald Jewsikow 443-263-6449

Chemicals Frank J. Mitsch 212-214-5022

Kamellia Saroop 212-214-8011 Containers & Packaging

Chris D. Manuel 216-643-2966 Gabe S. Hajde 216-643-2967 Derek Jose 216-643-2968

Diversified Industrials Allison Poliniak-Cusic, CFA 212-214-5062

Michael L. McGinn 212-214-5052 Machinery

Andrew Casey 617-603-4265 Jorge Pica 617-603-4376 Chris Laserinko 617-603-4270

Engineering & Construction Justin Ward 617-603-4268

Shipping, Equipment Leasing, & Marine MLPs Michael Webber, CFA 212-214-8019

Donald D. McLee 212-214-8029 Hillary Cacanando, CFA, CPA 212-214-8040 Donald Bogden 212-214-8037

Transportation Casey S. Deak, CFA 443-263-6579

MEDIA & TELECOMMUNICATIONS Advertising

Peter Stabler 415-396-4478 Blake Nelson 415-396-4064

Media & Cable Marci R. Ryvicker, CFA, CPA 212-214-5010 Eric Katz 212-214-5011 Stephan Bisson 212-214-8033

Se H. Kim 212-214-8044 Satellite Communications

Andrew Spinola 212-214-5012 Telecommunication Services - Wireless/Wireline

Jennifer M. Fritzsche 312-920-3548 Eric Luebchow 312-630-2386

Caleb Stein 312-845-9797

REAL ESTATE, GAMING & LODGING Gaming

Cameron McKnight 212-214-5046 Robert Shore 212-214-8009 Daniel Adam 212-214-8066

Healthcare/Manufactured Housing/Self-Storage Todd Stender 562-637-1371

Philip DeFelice, CFA 443-263-6442 Jason S. Belcher 443-462-7354

Lodging/Multifamily/Retail Jeffrey J. Donnelly, CFA 617-603-4262

Dori Kesten 617-603-4233 Robert LaQuaglia, CFA, CMT 617-603-4263

Tamara Fique 443-263-6568 Office/Industrial/Infrastructure

Blaine Heck, CFA 443-263-6529

TECHNOLOGY & SERVICES Applied Technologies

Andrew Spinola 212-214-5012 Communication Technology

Jess Lubert, CFA 212-214-5013 Michael Kerlan 212-214-8052

Gray Powell, CFA 212-214-8048 Priya Parasuraman 617-603-4269

Information & Business Services William A. Warmington, Jr. 617-603-4283

Bill DiJohnson 617-603-4271 Internet

Peter Stabler 415-396-4478 Steve Cho 415-396-6056 Blake Nelson 415-396-4064

Internet Infrastructure Gray Powell, CFA 212-214-8048

Priya Parasuraman 617-603-4269 IT & BPO Services

Ed Caso, CFA 443-263-6524 Richard Eskelsen, CFA 617-603-4267

Tyler Scott, CFA 443-263-6540 IT Hardware – Wireless Equipment

Maynard Um 212-214-8008 Munjal Shah 212-214-8061 Jason Ng 212-214-8007

Semiconductors David Wong, CFA, PhD 212-214-5007

Amit Chanda 314-875-2045 Keith Kan, CPA 212-214-5066 Joy Zhang 212-214-8017

Transaction and Business Services Timothy W. Willi 314-875-2044

Robert Hammel 314-875-2053 Alan Donatiello, CFA 415-396-3345

STRATEGY Equity Strategy

Gina Martin Adams, CFA, CMT 212-214-8043 Peter Chung 212-214-8063

Strategic Indexing Daniel A. Forth 704-410-3233

ECONOMICS Economists

John E. Silvia, PhD 704-410-3275 Mark Vitner 704-410-3277 Jay H. Bryson, PhD 704-410-3274 Sam Bullard 704-410-3280 Nick Bennenbroek 212-214-5636 Eugenio J. Alemán, PhD 704-410-3273 Anika Khan 704-410-3271 Azhar Iqbal 704-410-3270 Tim Quinlan 704-410-3283 Eric Viloria, CFA, CMT 212-214-5637 Michael A. Brown 704-410-3278 Sarah Watt House 704-410-3282

RETAIL RESEARCH MARKETING Retail Research Marketing

Colleen Hansen 410-625-6378

August 9, 2016

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