Bangkok Life Assurance

Bangkok Life Assurance Plc (BLA)
Investment thesis: BLA will set provisions for its life policy reserve equal to 63-68% of total premiums. The high provision-setting last year was aimed at building long-term earnings growth—all provisions will be allocated to new investments and will be tax-deductible. Thus, we maintain our conservative profit forecasts at Bt3.7bn for FY12, up only 8% YoY, and Bt4.5bn for next year, up 20%. Given an inexpensive PER of 14x and the favorable interest rate outlook, we maintain our BUY rating.  
A new high-margin product: Management guides for growth of 12% in first-year premium (FYP) sales and 18% in total premium revenue. BLA plans to launch a new product, “Whole Life First” in late 2Q12. However, high-margin products, such as Whole Life and Credit Life normally sell more slowly than endowment products which are very popular now but pay slim margins.
Promising ROI: BLA posted an ROI of 5.5% for 1Q12, up from 5.1% in 4Q11 because of a big investment gain of Bt198m and a well-managed investment portfolio. Management has set a modest ROI target of 5.0% for FY12 (below our FY12 ROI assumption at 5.3%). We believe BLA’s ROI has scope to rise further on policy interest rate increases and gains from securities trading.
Maintaining provisioning policy at 63-68%: The firm plans to set provisions for its life policy reserve equal to 63-68% of total premiums, compared with 65% provisioning last year. As such, we maintain our life policy reserve provisioning assumption at 65% of total premiums. The implication is that BLA should post lower underwriting profit growth in FY12 than last year.
Substantial risk-based capital: At end-March, BLA‘s equity/policy reserve ratio was high at 16%. The minimum requirement is only 2%. A new risk-based capital (RBC) rule came into force in 3Q11 at a floor rate of 125%, which will rise to 140% at YE13. Note that BLA had a robust RBC of 252% at end-March 2012, which would be adequate for operations through FY12-FY13.
Outlook
More emphasis on high-margin products: BLA posted 12% YoY growth in total premiums in 1Q12 (FYPs fell 1.5% YoY, but RYPs jumped 12% YoY), below the industry growth rate of 17% YoY. Note that the firm emphasized more on high-margin products, such as Whole Life and Credit Life, both of which sell more slowly than plain vanilla endowment policies. Additionally, Bangkok Bank did not push bancassurance sales very aggressively during 1Q12 because plain vanilla life assurance products (endowment policies) are bought most heavily toward year-end in order to take optimal advantage of the tax rebate. With the policy to concentrate on high-margin products, management has set FY12 growth targets of 12% for FYPs and 18.5% for total premiums. We anticipate that BLA will sustain its total life assurance market share at 9.6%, the level it achieved last year.
Management views that the market for endowment products is very competitive, so margins are thin. Besides, the premium payment durations of these products are very short (such as 1-3 years), but the premium payment durations for life assurance coverage are long (7-15 years). Therefore, the firm needs to provision more heavily for its life policy reserve and cost of offering life assurance is higher than for other products. Note that provisioning for the life policy reserve to a level equal to 62% of total insurance premium value is tax-deductible. But some endowment products from rivals require provisions exceeding 62% of total insurance premiums. Thus, they will tend to pay higher effective corporate tax rates than BLA. Note that management expects the firm’s effective corporate tax rate to be in the 26-28% range this year.