Bangkok Life Assurance
Flooding and heavy provisions HOLD (Downgraded) Target price: Bt54.00 Price (07/02/12): Bt49.50
Bangkok Life Assurance Plc (BLA)
Investment thesis: BLA will set heavy provisions for its life policy reserve, starting 4Q11. The policy is aimed at building long-term earnings growth—all provisions will be allocated to new investments and will be tax-deductible—but in the interim it will make for lower profits this year and next. As such we have revised down our FY12 and FY13 bottom-line forecasts by 30% and 27%, respectively, to Bt3.7bn and Bt4.5bn. The lower expectations for earnings mean that our YE12 target price (pegged to economic value) drops to Bt54 down from Bt62. Consequently, we have cut our BLA rating from BUY to HOLD.
Bottom-line contraction: We anticipate that the firm will post a poor 4Q11 profit of Bt708m, down by 46% YoY and 33% QoQ, due to a sharp drop in first-year premiums (as a result of the flooding; in line with the industry trend) and a higher YoY provisions/total premiums ratio for the life policy reserve. We estimate that 4Q11 provisions will equal 60% of total premiums, up from 58% for 4Q10 (but about the same as for 3Q11). Moreover, the firm is likely to report an investment loss in the region of Bt58m.
4Q11 revenue dampened by flooding: BLA ranked fourth among life assurance companies with a 9.6% market share of total life assurance premiums for FY11, up from 8.9% in FY10, thanks to aggressive sales in 9M11 ahead of the flooding. We expect that the inundation had a major impact on 4Q11 FYPs and will cause some squeeze to 1Q12 FYP revenue (note that in 4Q11, BLA re-introduced its product champion, Gain 1st 248, and launched a policy called Gain 1st 330 in order to boost FYPs).
ROI decline: We estimate an ROI of 4.4% for 4Q11, down from 5.9% the previous quarter. This is due to lower dividends received on investments and some investment losses. Our 4Q11 net investment income projection (excluding investment losses) is Bt1.2bn, up 34% YoY but down 2% QoQ. We also expect BLA to report an investment loss of Bt58m for the quarter, a reversal from investment gains of Bt165m in 4Q10 and Bt172m in 3Q11.
