Thai Reinsurance

Lifting CAR via selling 9% stake in THREL. THRE sold 55mn shares (9.17%) of THREL to Fairfax Financial Holdings (its major shareholder) at a price of Bt14.7/share on November 7. This is no surprise and was done to manage its capital funds. Investment in THREL has been a big drag on its capital adequacy ratio due to its high concentration risk. This sale will enhance THRE’s capital adequacy ratio, easing pressure for recapitalization.

Impact on forecast. In 4Q14 THRE will book a gain of Bt754mn before tax (Bt603mn after tax, Bt0.14/share) from the sale of 9.17% in THREL. This cuts our forecast 2014 net loss to Bt831mn from Bt1.4bn and raises 4Q14F net profit to Bt825mn from Bt222mn. We cut THRE 2015F earnings by ~3% as the cut in its holdings in THREL to 41.67% from 50.83% will reduce earnings contribution from THREL. This has an immaterial impact on target price as we already place the market value of THREL in THRE’s valuation. We keep target price unchanged at Bt4/share (2.3x 2015F BVPS plus unrealized gain from THREL at Bt0.9/share).

Turnaround with possible credit rating upgrade. After making the final flood claim reserve in 3Q14, THRE’s earnings are expected to turn the corner in 4Q14 and 2015. Clearing out the flood claims allows THRE to get back to growth. It plans to raise non-life insurance premium growth to >10% in 2015F from 6% in 2014F, focusing on personal products, particularly health and auto insurance. It continues to target high 20% growth in life insurance in 2015. We expect a rise in net premium growth from 9% in 2014F to 13% in 2015F. THRE expects S&P to upgrade its credit rating after the recapitalization and flood claim provisions: after the 2011 floods, S&P downgraded THRE to BBB+, below the level (‘A’) qualifying it as a reinsurer, costing THRE ~Bt800mn in premiums from international clients. THRE expects to get its ’A’ rating back in 2016, reopening the door to the international market.

Maintain Buy, underpinned by: 1) turnaround after clearing flood claims; 2) better normalized combined ratio on a shift to non-conventional insurance and life insurance, and 3) L-T upside risk from credit rating upgrade by S&P, allowing a return to the international reinsurance market.