Bangkok Life Assurance

Very weak earnings

Bangkok Life Assurance Plc (BLA)

Below all estimates: BLA reported a 4Q11 profit of only Bt75m, a plunge of 94% YoY. The result missed our estimate by 89% and the consensus by 92%, due to much heavier provisioning for the life policy reserve than we expected. As such, FY11 profit rose 22% to Bt3.4bn, equal to only 83% of our estimate.

Results highlights: Total premiums in 4Q11 rose by 5% YoY and 25% QoQ to 8.5bn, led by the re-launch of a product champion, Gain 1st 248, and strong renewal year premiums. Thus, FY11 total premiums grew 20% YoY to Bt31bn, despite intense competition and the impact of the flooding. Provisioning for the life policy reserve equaled 78.5% of total premiums in 4Q11, up sharply from 60% at end-Sept (our estimate was 65%). Note that provisioning in excess of 65% of total premiums isn't tax-deductible. Thus, BLA's effective corporate tax rate for 4Q11 was 95%, up from 24% in 4Q10.

ROI was 5.1% in 4Q11, which was in line with our estimate. Investment income came to Bt1.3bn, up by 44% YoY and 6% QoQ, driven by fast growth in invested assets and a well-managed equities portfolio.

Outlook: BLA will maintain heavy provisioning for the life policy reserve in 1Q12 onward in order to accelerate investment asset expansion, which will make for a better ROI in the future. We expect the life policy reserve/total premiums ratio to be about 65% for FY12.

What's changed? Our FY12 earnings forecast stands at Bt3.7bn, up a modest 8% YoY.

Recommendation: BLA is well-positioned to cope with intensifying competition, given its current substantial market share, new product initiatives and sales support from Bangkok Bank's nationwide branch network. Furthermore, the life assurance industry tends to be fairly resilient to the vagaries of the business cycle. We expect a post-flooding turnaround in first-year premium growth. Note that there may be scope for upside to our current FY12 earnings forecasts if BLA can deliver an ROI in excess of our model with a lower effective corporate tax rate than we currently assume.

The stock price has fallen 12% since our downgrade from BUY to HOLD on Feb 2. BLA's price drop prompted us to raise our rating back to BUY with an unchanged YE12 target price of Bt54 (based on economic value).