Thai Reinsurance

Thai Reinsurance Plc (THRE)

 

We maintain Buy on THRE with a slight cut in TP to Bt3.8/share. We like it for: 1) turnaround in 2015 after clearing flood claims; 2) resumption of dividend on 2015 operations and 3) the possibility its credit rating will be upgraded to “A” in 3Q15, sooner than expected, which will allow it to return to the international reinsurance market.  

 

Further divestment of THREL to lift CAR to 300%. Aiming to lift its capital adequacy ratio (CAR) to 300% from 158-159% at YE2014, THRE is planning to divest more of its holding in THREL to bring it to ~25% from 41.67% now, after selling 55mn shares (9.17%) of THREL to Fairfax Financial Holdings (its major shareholder) at a price of Bt14.7/share on November 7. A reduction in THRE’s holding in THREL to 25% would mean the sale of 100mn THREL shares (16.67% of THREL’s paid-up shares), which translates to a realized gain of Bt1.36bn (Bt1.09bn after tax, Bt0.26), based on the last close of Bt14.6/share. The Bt1.5bn concentration risk charge from the market value of its investment in THREL – which exceeds the regulatory ceiling of 15% of total assets - is a huge drag on its CAR. To keep its investment value in THREL no higher than 15% of total assets, it calculates that it can still hold ~25% in THREL. We expect the divestiture to be no later than 2Q15, in time for a credit rating review.  

 

Expects credit rating upgrade to “A” in 3Q15. THRE has hired A.M. Best Company (a U.S.-based rating agency that focuses on the insurance industry) to review its credit rating in 2Q15. THRE expects to be rated “A”, and this will qualify it as an international reinsurer, a status it lost after the floods in 2011 caused S&P to downgrade its credit rating to BBB+. By its estimates, this downgrade led to a loss of ~Bt800mn in premiums from international clients. THRE believes that if it can raise CAR to 300% by reducing its holding in THREL to 25%, it will get its “A” rating back in 3Q15, reopening the door to the international market. We have not factored the return of international clients into our 2015 premium forecast. An upgrade in its credit rating to “A” thus provides upside risk to our premium growth forecast.  

 

To resume paying dividend on 2015 operations. THRE plans to clean up its retained losses (Bt9.7bn as of 3Q14) and resume paying dividends on 2015 operations, though initially small. Net of Bt6.2bn premium on shares and Bt1.8bn of other components of equities gives a 3Q14 retained loss of Bt1.34bn. Based on our forecast net profit of Bt775mn in 4Q14F and Bt784mn in 2015F, it will have residual retained earnings of Bt222mn (Bt0.05/share). We estimate a small DPS of Bt0.02/share (equivalent to 10% payout ratio) on 2015 operations.   

 

Back to growth. Clearing out the flood claims in 2014 allows THRE to get back to growth. It plans to raise non-life reinsurance premium growth to 10% in 2015F from 3% in 2014F, focusing on personal products, particularly health and auto reinsurance. It continues to target high 17-18% growth in life reinsurance in 2015 and expects consolidated net premium growth to rise to 12% in 2015 from 7% in 2014. 

 

Improving combined ratio. THRE expects an improvement in combined ratio to 95-96% in 2015F from 98% in 2014F for non-life reinsurance and 73-74% in 2015F from 76% in 2014F for life reinsurance. For non-life reinsurance, improvement in combined ratio in 2015 is expected to come from an easing in combined ratio from the teacher health insurance project which had an unusually high combined ratio of 104-150% in 2014. For life reinsurance, an improvement in combined ratio in 2015 is expected to come from the absence of a one-off loss from direct TV products incurred two years ago but just realized as expenses in 3Q14.    

 

4Q14F: The start of a turnaround. We forecast a turnaround in its bottom line to Bt766mn net profit in 4Q14F from Bt1.66bn loss (mainly from the Bt2.2bn final flood claim reserve) in 3Q14, translating to Bt890mn loss in 2014F. 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. THRE expects to end 2014 with consolidated premium growth of 7%, comprised of 3% for non-life reinsurance (-13% for conventional products and +8% for non-conventional products) and 17% for life reinsurance (+16% for conventional products and +20-22% for non-conventional products). Management guides that 2014F combined ratio was ~98% for non-life reinsurance (excluding the flood claim reserve) vs. 93% in 2013 and 76% for life reinsurance vs. 69% in 2013.  

 

Cut 2015F and TP. We cut THRE’s earnings by 25% in 2015F and 21% in 2016F, mainly due to raising combined ratio to line up with management guidance. We cut target price to Bt3.8/share (2.3x 2015F BVPS plus unrealized gain on THREL of Bt0.89/share) from Bt4/share.