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Bangkok Life Assurance

Opportunity in crisis

Bangkok Life Assurance Plc (BLA)

Opportunity as commercial banks ease back on deposits and US tapers QE. The conjunction of less interest in raising deposits by commercial banks and rising L-T bond yield from US QE tapering creates a good opportunity for life insurance companies to grow insurance premiums, though this will be partially offset by lower consumer purchasing power. As a result of the prolonged political unrest, commercial banks expect a substantial slowdown in loan growth and are thus less aggressive in raising deposits, preferring to focus on reducing cost of funds. This means less competition for life insurance products, particularly savings products. In the meantime, the US' QE tapering has led to a rise in L-T bond yield. This gives life insurance companies a chance to launch products that are more alluring than deposits at banks.

Aggressive market share expansion. BLA aims to lift its market share ranking to #3 from #5 for total premiums within the next five years. To achieve this, it has set its sights on growing 2014 new business premiums by 47% (vs. 20percent for 2013) with 24% growth in total premiums (vs. 14percent for 2013). It sees room to expand in credit life products via bancassurance, where BLA still lags chief competitors. Its goal is to almost double credit life premiums to Bt3.5bn in 2014 from Bt1.8bn in 2013. We are more conservative and forecast 30% growth in new business premiums and 18% growth in total premiums in 2014F.

Resumption of growth in VNB in 2014. BLA's management expects 1-year value of new business (VNB) to resume growing in 2014F following the expected stagnation at ~Bt1.6/share in 2013. Despite the 20% growth in new business premiums, 1-year VNB in 2013 is believed to be unchanged YoY, mainly because its new business that year had a much lower margin than 2012 new business, evident in a 176 bps fall in underwriting margin to -1.29percent for 2013. Note: It is expected to release 2013 embedded value (EV) and 1-year VNB in late April. In 2014, we expect 1-year VNB to grow 20%, slower than new business growth of 30%, as we expect a slight fall in underwriting margin.

Further fall in 2014F underwriting margin. BLA's management guided to a ratio of life policy reserve and benefits paid to net premiums of ~91% in 2014F (66percent for life policy reserve) vs. 90.1percent for 2013. We thus expect a further fall in underwriting margin by 89 bps to -2.19%.

Maintain Buy with TP rolled over to Bt77 from Bt74 (Bt36 EV plus Bt40 VNB) as we move valuation to YE2014 from mid-2014. Backing our Buy call is: 1) continued strong earnings growth of 20% in 2014F and in VNB in 2014 and 2) the growth opportunity presented by the conjunction of lower interest in building deposits by commercial banks and rising L-T bond yield from the tapering of the US' QE.

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