THURSDAY, March 28, 2024
nationthailand

Bangkok Life Assurance

Bangkok Life Assurance

Less volatility going forward Outperform

Bangkok Life Assurance Plc (BLA)

Less volatility going forward
 
We maintain our Outperform rating on BLA and increase our target price from Bt43.50 to Bt48 as we raise our 2016-18 earnings forecasts by 152%/27%/-7%. The earnings upgrade reflects the expectation BLA will reverse policy reserve booked in 1Q16 after the Office of Insurance Commission (OIC) allowed life insurance companies to add illiquidity premium to the discount rate used to calculate reserve liability. We expect lower earnings volatility going forward thanks to the new illiquidity premium rule. As KBANK expects a year-end bond yield of 2.10% and as we believe the interest downtrend is over, we do not expect any sharp decline in yield as occurred in 1Q16 (-70 bps QoQ) in the coming quarters. Based on an expected bond yield uptrend and improving NEP growth, we expect a strong earnings recovery in 2017-18.
 
Investment highlights
 
- Illiquidity premium added to result in a reserve reversal. We expect BLA to book a reversal of policy reserve of Bt7.5bn in 2016 after the Office of Insurance Commission (OIC) allowed life insurance companies to add illiquidity premium to the discount rate used to calculate reserve liability starting from 2Q16. A higher discount rate used should result in a lower required policy reserve. BLA should therefore be able to reverse LAT reserve it booked previously amounting to Bt10.8bn (partially) due to a significant drop in bond yield in 1Q16 (Fig 1). The increase in bond yield in 2Q16 to 2.03% from 1.71% in 1Q16 (Figs 3 & 5) should also result in a lower policy reserve. Apart from the policy reserve reversal expected in 2Q16, we are also positive about the adding of illiquidity premium to the discount rate, as this will result in BLA’s earnings being less volatile going forward. 
 
- Downtrend of interest rates is over; 2Q16 earnings to turn to black. We believe earnings bottomed in 1Q16 from a net loss of Bt6.8bn in 1Q16 and will turn to a positive net profit of Bt3.8bn in 2Q16. The significant earnings improvement is based on our assumption that the bond yield already reached its lowest level in 1Q16. KBANK’s 2016 year-end bond yield forecast of 2.10% implies no further deep accounting losses to occur in the remaining quarters as occurred in 1Q16. This, together with the illiquidity premiums, should result in earnings improving in 2Q16-4Q16. Also, we expect an interest rate uptrend in 2017-18 on an expected increase in 10-year bond yield by 25-50 bps possibly toward the end of 2017. Earnings should follow a similar trend with 2016 earnings to be the lowest and then recover in 2017-18. 
 
- Revising up 2016 earnings by 152%. We raise our 2016 earnings forecast by 152% as we lower our increase reserve to NEP ratio assumption from 83.1% to 68.3% for 2016 and from 65.7% to 62.9% for 2017. We also cut our net earned premium assumption by 8.3%/10.0%/13.5% for 2016-18 as we lower our net earned premium growth assumption from 6%/7%/10% to -3%/5%/6% to reflect weak net earned premiums in 5M16, which dropped by 12% YoY. We expect NEP in the remaining months of 2016 to recover from BLA’s plan to issue more short-term products to boost sales. Other assumptions remain largely unchanged. 
 
Valuation
- We maintain our Outperform rating on BLA with a new target price of Bt48 (from Bt43.50) based on the DDM method. We believe earnings bottomed out in Q1 given a higher 10-year bond yield outlook expected in 2017-18. The effect of illiquidity premiums allowed to be added to the weighted average discount rate used in the insurance liability calculation will be reduced earnings fluctuations going forward. Given this and our end-2016 10-year bond yield assumption of 2.10%, we believe earnings bottomed out in 1Q16 and that quarterly earnings will remain profitable going forward.  
 
 

 

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