Bangkok Life Assurance

Bangkok Life Assurance Plc (BLA)
Investment thesis
The prospects for both the Thai life assurance industry and BLA are good. The firm benefits from strong sales support from Bangkok Bank’s 1,111-branch network and rising sales of fatter margin products (Whole Life 1s t and credit protection). BLA’s large risk-based capital ratio of 238% will accommodate business growth for years into the future without risk of a cash call being necessary. Additionally, provisioning for the life policy reserve is declining in proportionate terms on rising economies-of-scale, which should boost earnings growth in 3Q12 onward. We maintain our BUY rating.     
Expect 3Q12 earnings jump of 19% QoQ
We expect BLA to report a 3Q12 profit of Bt960m, up 19% QoQ (but down 10% YoY). The anticipated better QoQ earnings were driven by lower provisioning for the life policy reserve. Also, BLA built its First-Year Premium (including single premiums) sales by 12.5% YoY to Bt1.95bn in 3Q12 (according to Thai Life Assurance Association figures). The rising FYP and single premium sales were mostly for high-margin products, such as Whole Life 1st and credit protection. Likewise, its Renewal Year Premiums and total premiums rose by 12.3% YoY and 12.4% YoY, respectively, to Bt5.8bn and Bt7.7bn. 9M12 total premiums grew 16.7% YoY to Bt26.8bn, in line with the 9M12 industry growth rate of 16.4% YoY.  
Lower proportionate 3Q12 provisions = higher earnings
The 3Q12 concentration on high-margin products and greater economies-of-scale should enable BLA to set lower provisions for its life policy reserve as a percentage of total premium revenue. We expect a ratio of 68.5%, down from 71% for 2Q12. As such, its profit from life assurance sales is expected to jump by 57% QoQ and 28% YoY to Bt354m.
Slight QoQ decline in 3Q12 ROI
We calculate that 3Q12 ROI will be 4.3%, down from 4.8% in 2Q12, due mainly to lower gains on investments and lower dividend income for the quarter.  We estimate 3Q12 investment income of Bt1.3bn, up 5% YoY but down 5% QoQ. But we also assume that investment gains for the quarter will post a dive of 26% QoQ and 61% YoY to Bt68m.
Strong capital; no cash call concerns
The current duration gap (mismatch period) between investment portfolio maturation (seven years) and the mean liability time-frame (14 years) is currently seven years. BLA will reduce that gap to five years in FY13 in order to reduce reinvestment rate risk. That should make for a CAR of above 200% for at least the next couple of years. BLA’s CAR is currently about 248%, much higher than the Office of the Insurance Commission’s minimum requirement of 140%.