Bangkok Life Assurance

Bangkok Life Assurance Plc (BLA) 

Investment thesis

BLA provisioned heavily for the life policy reserve (due to big sales of single-premium endowments) and for lower interest rates in FY14. As such, we have slashed our FY14 profit forecast by 23% to Bt850m. We expect the firm to switch focus back to long-term products with fatter margins this year. Thus, BLA it will set lighter provisions for the life policy reserve of 68-70% of total premiums this year (~86% in FY14), so its earnings will rise sharply. Our FY15 profit forecast of Bt4.4bn stands unchanged. We have a BUY call with a YE15 target price of Bt67, pegged to YE15 embedded value of Bt29.74/share and VNB of Bt37.26/share.

FY15 sales focus shift to longer-term products with fatter margins

After delivering impressive FY14 expansion of 81% YoY in FYPs (driven by short-term endowments) and 33% in total premiums, BLA has switched focus from short-term policies (Gain 1st 245) to long-term products (long-term endowments and credit protection such as Bualuang Huang Luk Lan and Bualuang Huang Krobkrua, pension funds 555/600) and whole life products with premium payment periods of at least seven years. These products carry fat margins, but are more difficult to sell.

Lighter provisioning in FY15

We assume provisioning for the life policy reserve at 70% of total premiums both this year and next. The renewed focus on fat-margin products will allow the ratio to fall steeply in 1Q15 onward. Note that we have raised our FY14 provisioning assumption from 83% of total premiums to 86% to factor in the risk of losses on the re-investment rate because of lower interest rates, hence, the 23% dive in our FY14 profit projection to Bt850m. If interest rates were to start rising this year, BLA could reverse some of its interest rate provisioning and book it as revenue.

Anticipate 4Q14 earnings dive of 49% YoY

We expect firm to post a 4Q14 profit of Bt466m, down 49% YoY (but a QoQ turnaround from a loss of Bt881m in 3Q14). The assumed QoQ turnaround is due to lighter provisioning for the life policy reserve, as BLA switched into fatter margin products with longer maturities. We expect 4Q14 provisions for the life policy reserve equal to 86% of total premium revenue, down from 98% in 3Q14. 4Q14 total premium (plus single-premium) revenue is estimated at Bt8bn, down 3% YoY (but up 12% QoQ).