Bangkok Life Assurance

Investment thesis

After focusing on short-term endowment products in 1H14, BLA has switched focus back to long-term products with fatter margins. Thus, its 2H14 earnings will rise HoH, as provisioning for the life policy reserve will be lighter. Our profit forecasts of Bt4bn in FY14 and Bt5.4bn in FY15 stand unchanged. We have a BUY call on BLA with a YE15 target price of Bt79, pegged to YE15 embedded value of Bt32.3/share and VNB of Bt46.6. 

2H14 sales to switch to longer-term products with fatter margins

FYP sales jumped 200% YoY in 1H14, led by slim-margin single-premium products. But BLA has shifted its saving/endowment product sales focus from short-term policies (Gain 1st 116 and Gain 1st 245) to long-term policies (Bualuang Huang Luk Lan and Bualuang Huang Krobkrua), Bualuang pension funds (555/600) and whole life products with premium payment periods of at least seven years. These products carry fatter margins and require much lighter provisioning, but are more difficult to sell.

Provisioning to normalize in 2H14

The 1H14 focus was on short-term low-margin endowment products, for which BLA set heavy provisions for its life policy reserve equal to 84% of total premium revenue. Management guides for a ratio range of 65-69% for the year. We, however, maintain our life policy reserve provisioning assumptions at 76% of total premiums this year and 68.5% in FY15. We expect the focus shift to fat-margin products to allow the ratio to fall sharply HoH in 2H14 and BLA’s profitability to increase. The 3Q14 ratio should be about 68%.

FY14 ROI target of not less than 5%

BLA guides for ROI of at least 5% for FY14 and FY15 after posting 5.2% in 2Q14 (the SET turned around). Higher bond yields present an opportunity for it to accumulate more medium- to long-term bonds. BLA recently invested Bt13bn (10% of its investment portfolio) in foreign currency-denominated bonds that yield over 6%.

Anticipate 3Q14 earnings growth of 20% YoY

We expect BLA to post a 3Q14 profit of Bt1.33bn, up by 20% YoY and 685% QoQ. The assumed spectacular QoQ earnings growth is largely due to lighter provisions for the life policy reserve, as the firm switched into high-margin products with longer maturities. We expect provisions for its life policy reserve to equal 68% of total premium revenue, down from 83% in 2Q14. 3Q14 total premium (including single-premium products) revenue is estimated at Bt9.6bn, up by 15% YoY (but down 1% QoQ).