Bangkok Life Assurance

Bangkok Life Assurance Plc (BLA) 

 

Interest rate risk spurs anticipated loss in 3Q15 

We expect the firm to post a 3Q15 loss of Bt235m, much better than the bigger loss of Bt881m in the same period last year but down from strong profit of Bt1.84bn last quarter. The assumed YoY figure is due to less provision for its life-policy reserve (on rising low interest rate risk). We expect 3Q15 provisions for its life-policy reserve equal to 86% of total premium revenue, from 98% in the same period last year. The 3Q15 total premium (plus single-premium) revenue is estimated at Bt8.4bn, up 15.9% YoY and 15.8% QoQ on a seasonal basis. Guidance is for 3Q15 ROI of 4.8% from 5.2% last year. The chance of lower bond yields early in Jun-Nov would limit BLA to the accumulation of more long-term bonds. We forecast revenue from investment to be Bt2.7bn in 3Q15 (equivalent to ROI of 4.8%), up 13% YoY.

4Q15 outlook to focus on long-term products with fatter margins

We forecast its FY15 sales will decline 8% YoY to Bt47bn, as BLA has switched focus from short-term policies (Gain 1st 245) to long-term products (long-term endowments, pension 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 four years. The firm is concentrating on long-term products in 4Q15, which carry fatter margins but are more difficult to sell.

Rising provision risk from accounting change in 3Q15 onwards

We assume provisioning for its life-policy reserve to be 70% of total premiums both this year and next. The renewed focus on wider-margined products will allow the ratio to fall moderately in 2H15 and FY16. BLA expects to set a higher extra provision for interest rate risk in 2H15 after its accounting policy changed back to the Liability Adequacy Test (LAT) from former best estimates. This implies that if interest rates were to stop dropping in late 2H15, BLA could have the chance to release some of its interest rate provisioning into revenue. However, we expect BLA to maintain its FY15 provision at 70% of total premiums, against 83% in the same period last year. 

Investment thesis

Its greater emphasis on products with higher margins, such as whole-life, longer-term endowments and credit-life policies, allows BLA to offset extra provisions for interest rate risks. This means no earnings changes in our forecasts in FY15-FY16. Therefore, we maintain our FY15 profit forecasts of Bt4.4bn for FY15, up 65% YoY, and Bt5bn for FY16, up 14% YoY. Our BUY rating stands with a YE15 trading price of Bt67, pegged to an embedded value of Bt31.26/share and total VNB of Bt35.8.