Bangkok Life Assurance

Bangkok Life Assurance Plc (BLA)

Banks’ easing deposit competition lifts premium growth, as evident in BLA’s stronger net premium growth (a record high of 106% YoY and 220% QoQ) than expected in 1Q14, mainly driven by a surge in single premiums. New business premiums in 1Q14 skyrocketed 200% YoY and 657% QoQ, 81% of which were single premiums. Product mix shifted more toward endowment policies (96% of new business premiums vs. 90% for 1Q13) and channel mix moved toward bancassurance (93% for 1Q14 vs. 85% for 1Q13). We believe fixed deposits are migrating to endowment insurance this year as banks determinedly chased high-cost deposits away to sustain net interest margin. BLA topped all life insurance companies with the highest market share in terms of first-year premiums (29%), total premiums (20%), and bancassurance (42%) in 1Q14.
High 2014F net premium growth. BLA raised its 2014 target for new business premiums to Bt23bn (+118%) from Bt16bn (+51%) as new business premiums in 1Q14 already accounted for 93% of the original target. To fine tune with 1Q14 and its new guidance, we raised our 2014F net premium growth to 39% from 18% as we tripled our 2014F new business premium growth to 105% from 30%. We maintain our renewal premium growth at 16%. 1Q14 new business premiums account for 68% of our revised full-year forecast. The company plans to gear down growth and focus more on enhancing profitability by launching high-margin products (i.e. L-T and life protection products) for the rest of the year. 
Cut 2014F ROI. We lowered our assumption for return on investment (ROI) by 7 bps to 5.08% (vs. 5.13% for 2013) to factor in the expected 50 bps cut in policy rate in 1H14 (after already cutting 25 bps in 1Q14), the YTD fall in L-T bond yield (around 35 bps for 10-year government bonds), and the lower ROI than expected in 1Q14 at 4.71%.
Upside risk on underwriting margin. Despite a higher proportion of low-margin single premiums (requires high life policy reserve), 1Q14 underwriting margin rose 138 bps YoY and 297 bps QoQ to -0.85%, mainly due to: 1) a sharp fall in commission ratio of 293 bps YoY and 323 bps QoQ to an unusually low 3.84% on a higher proportion of bancassurance and 2) lower benefit payment ratio. We conservatively expect a fall in underwriting margin for the rest of the year, to -1.47% for 2014F vs. -0.85% for 1Q14 and -1.29% for 2013.
Maintain Buy with a hike in TP to Bt82 (Bt35 EV plus Bt47 VNB) from Bt77 after raising our new business premium growth forecast to 105% from 30%. We maintain our Buy call on BLA on the back of: 1) expected strong earnings growth of 21-25% in 2014-2016F and 2) a 2014F strong growth opportunity presented by commercial banks’ easing deposit competition.