Bangkok Life Assurance

Bangkok Life Assurance Plc (BLA)

Upgrade to Buy on share price weakness. We upgrade BLA to Buy from Sell, as, in our view, BLA has entered undervalued territory following a 21% correction in the share price from the peak in May. We believe there are catalysts ahead lying in: 1) a recovery of underwriting margin on a return to focus on life protection products after sacrificing margin to build new business volume with savings products in 1Q13; 2) a recovery of L-T bond yield in late May after pricing in the 25 bps policy rate cut and the selling by foreign investors on worries over possible capital controls; and 3) a write-back of the policy reserve in 4Q13.  

Margin recovering after easing back on new business growth. After regaining sufficient market share in 1Q13, BLA plans to shift into lower gear in new business growth in order to shore up underwriting margin in the remaining three quarters. We expect it to increase its focus on life protection products, which will boost underwriting margin. This was evident in its April figures: +1% YoY and -79% MoM in new business premiums vs. the sector average of +32% YoY and -35% MoM. The active launch of low-margin savings products pulled BLA back up to #3 in the total premiums market in 1Q13, rising from #6 after two years of losing market share, beating its goal of bringing market share up to 5th from 6th by returning to low-margin savings products from life protection products. 1Q13A new business premiums rose 190% YoY and 110% QoQ, accounting for 40% of its aggressive 2013 target of 41% growth.  

4Q13 reserve write-back. BLA expects to write back ~Bt2bn in life policy reserves in 4Q13 upon the maturation of 12-year policies, which will offset the higher than expected reserves in 1Q13. With this in mind, we keep our 2013F life policy reserve ratio at 68% despite the sharp rise to 76% in 1Q13 from 64% in 4Q12 brought by its aggressive launch of short-term savings products. 

Strong earnings growth but low VNB growth in 2013. For 2013, we expect a strong 41% earnings growth in line with the new business growth but look for only single-digit growth in one-year VNB (8% SCBS forecast), as margin will be narrowed by the higher proportion of savings products despite the ambitious target of 41% growth in new business premiums. This is in contrast to 2012 when its 1-year VNB grew 20% as a result of the higher margin brought by the greater proportion of whole life products, although new business premiums grew only 6%.