Bangkok Life Assurance
Q2 2012 missed estimate, due to provisioning for SP policies BUY (maintained) Target price to Bt54.00 Price (08/08/12): Bt45.75
Bangkok Life Assurance Plc (BLA)
Below all estimates: BLA reported a 2Q12 profit of Bt808m, down by 37% YoY and 12% QoQ. The weak headline result was 15% below our estimate and 18% short of the Bloomberg consensus, due to heavy life policy reserve-setting and a high effective corporate tax rate of 38%. As such, 1H12 profit represents only 47% of our FY12 projection.
Results highlights: Total 2Q12 premiums jumped by 25% YoY and 13% QoQ to Bt9.97bn, boosted by Bt1.4bn in sales of single premiums (SP) for new products (mainly “Whole Life 1st 175”). The jump in SP sales meant that BLA had to raise provisions for its life policy reserve to 71% of total premiums at end-June (we had assumed 63.5%), up from 59.5% in 2Q11. The YoY increase in provisioning meant that the underwriting profit of the assurance unit fell to Bt226m from Bt793m in 2Q11.
Note that BLA’s Whole Life 1st 175 policy features a single premium payment in exchange for insurance protection for whole life. Thus, provisioning requirements for the single premium are very high the first year, but plunge the next year.
ROI was 4.8% in 2Q12, which was slightly better than our estimate of 4.7%, driven by a net investment gain of Bt91m (our assumption was only Bt70m). Investment income was Bt1.35bn, up by 21% YoY and 1% QoQ, boosted by invested asset expansion and good equity portfolio management.
Outlook: We expect the strong sales of Whole Life 1st to be sustained through 2H12, especially in 4Q12. Thus, we also anticipate high life policy reserve-setting of 63-68% of total premiums (we model for 65%).
What’s changed? Our FY12 earnings forecast stands unchanged at Bt3.7bn for the moment.
Recommendation: The successful sales of Whole Life 1st 175 will strengthen BLA’s long-term performance, as the product yields a fatter margin over the long-term than endowment policies. But that long-term gain comes at the expense of heavy short-term provision-setting. Given its favorable long-term earnings outlook, our BUY rating stands with a YE12 target price of Bt54.
