Bangkok Life Assurance

Bangkok Life Assurance  Plc
Investment thesis
We anticipate that BLA will deliver strong earnings growth in 4Q13 and FY14, led by higher margin products, such as whole life and credit life. Both product types require lower provisioning for the life policy reserve than we currently assume in our model, so there is scope for upside to our projections (higher interest rates in 2014 would also mean upside). However, for the moment our profit forecasts remain Bt4.7bn for FY13, up 43% YoY, and Bt5.4bn for FY14, up 15% YoY. We maintain our BUY rating with a YE14 target price of Bt75, pegged to embedded value of Bt34.4/share and total VNB of Bt40.6.
Aggressive FY14 FYP growth target of >30%
After delivering impressive 9M13 expansion of 34% YoY for FYPs (driven by short-term endowments) and 15.4% for total premiums, BLA has switched focus from short-term policies (Gain 1st 263) to long-term policies (whole life 1st 175, credit life and long-term endowments such as Gain 1st 245). The FY13 FYP growth target of 38% looks achievable. The firm has set an ambitious FY14 FYP growth target of over 30%. We forecast FYP expansion of 38% in FY13 and, conservatively, only 18% in FY14. If the firm were to achieve its FY14 FYP target, there would be significant scope for upside to our model.
FY14 provisions to decline YoY
The greater emphasis on long-term products with fatter margins will mean sharply lower provisions for the life policy reserve in 4Q13 and FY14. BLA guides for 4Q13 provisions equal to 67-69% of total premiums against 70% for 9M13. Management also says that FY13 provisions will exceed 67% of total premiums. Note that we expect provisions to equal 67% total premiums in FY13 and 65% in FY14. We also assume that benefit payments for life policies will equal 19.5% of total premiums in FY13 and 21.5% in FY14. 
Reiterate FY13 ROI target >5%
Despite the fluctuating SET, BLA is confident that it will achieve ROI of at least 5% for FY13 and FY14. Higher bond yields present an opportunity for it to accumulate more medium- to long-term bonds. Moreover, the firm recently invested Bt13bn (8% of total investment) in foreign currency-denominated bonds that provide high yields of 6-7%.
CAR will rise at YE13 onward
Given its greater emphasis on higher margin products, BLA’s CAR is expected to rise further from 266% at end-September. Management guides for a YE13 CAR rise to over 275% (the minimum requirement is only 140%), due to a reduced duration gap between investment maturity and liability maturity. BLA’s duration gap is now 3.3 years, based on maturities of 2.28 years for liabilities and 8.92 years for the investment portfolio. The firm aims to reduce the gap to less than three years in FY14.