Effective in 2025, new accounting standards TFRS17 and TFRS9 must be fully adopted, which will lead to more transparency, better reflection of profitability and less volatile bottom lines and equities. We expect the adoption of TFRS17 will be positive to TLI’s bottom line due to its high VNB margin. BLA has been shifting its product mix to more profitable products for several years in preparation for TFRS17 and we thus believe if there is any impact, it will be minimal. We keep BLA as our top pick on the back of expected strong earnings growth over 2025-2027 from a larger release of PAD reserve, 2) attractive valuation and 3) a potential target for Vayuphak fund and Thai ESG funds.
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Insurance - TFRS17 & 9: Less volatile earnings and equity
Insurance - TFRS17 & 9: Less volatile earnings and equity
Effective in 2025, new accounting standards TFRS17 and TFRS9 must be fully adopted, which will lead to more transparency, better reflection of profitability and less volatile bottom lines and equities. We expect the adoption of TFRS17 will be positive to TLI’s bottom line due to its high VNB margin. BLA has been shifting its product mix to more profitable products for several years in preparation for TFRS17 and we thus believe if there is any impact, it will be minimal. We keep BLA as our top pick on the back of expected strong earnings growth over 2025-2027 from a larger release of PAD reserve, 2) attractive valuation and 3) a potential target for Vayuphak fund and Thai ESG funds.
TFRS17: Removal of new business strain with less volatile earnings. Effective in 2025, a new accounting standard, TFRS17, will replace the current TFRS4. TFRS17 introduces three key changes: 1) valuation of insurance reserve, 2) presentation of income statement, 3) more transparent financial disclosure.
Valuation of insurance reserve will change from “partial reserve at book value” under TFRS4 to “full reserve at market value”, comprised of best estimate liability (BEL), risk adjustment (RA) and contractual service margin (CRM). Changes in BEL and RA can be booked either through other comprehensive income (OCI) or on the P&L.
Presentation of the income statement will change from “cash flow base” under TFRS4 to “source of profit base” under TFRS17 (insurance profit and investment profit). Under TFRS17, insurance revenue will comprise of: 1) release of CRM, 2) release of RA and 3) release reserve for claims & expenses. Insurance premiums, change in reserves and claims & expenses will no longer be booked on the P&L. The CSM (which is the key source of revenue) will be released gradually based on the service provided each year (called coverage unit), which will lead to less volatile earnings.
Under TFRS17, profitable products will no longer encounter “new business strain” (booking losses initially as expenses are front-loaded whereas returns are realized over time), while losses from onerous (loss-making) products will be recognized immediately on the P&L. The accounting change will impact net profit recognized each year but has no impact on total net profit over the contractual terms.
TFRS9: Less volatile equities. In 2025, life insurance companies must implement TFRS9 together with TFRS17 because TFRS9 will give the companies a chance to reclassify part of their assets into “fair value through other comprehensive income (FVOCI)” to align with a change in reserve (for which companies are likely to choose to book on the OCI rather than the P&L) in order to minimize volatility of equities when interest rates change.
Less impact from falling bond yield on earnings. Under TFRS17, a fall in bond yield (risk-free rate) will have less impact on the bottom lines of life insurance companies for two reasons. Firstly, they will no longer need to set aside liabilities adequacy test (LAT) reserve. Secondly, both assets and liabilities are expected to be marked to market through the OCI.
Expect to be positive to TLI. Value of new business (VNB) is an indicator for CSM. We expect the adoption of TFRS17 will be positive for TLI’s bottom line due to its high VNB margin. BLA has been shifting its product mix to more profitable products for several years in preparation for TFRS17 and we thus believe if there is any impact, it will be minimal. We expect a minimal impact on THREL and THRE as by nature they have low exposure to long-term contracts.
Keep BLA as the sector pick. We keep BLA as the sector pick on: 1) strong earnings growth over 2023-2026 at 26% CAGR from a release of provisions for adverse deviation (PAD) reserve, 2) attractive valuation and 3) a potential target for Vayuphak fund and Thai ESG funds.
Key risks: Key risks include: 1) pressure on customer purchasing power, 2) capital market volatility, 3) bond yield movement, 4) the implementation of new accounting standards, particularly IFRS17 and 5) ESG risk on market conduct.