Thai Reinsurance

Thai Reinsurance Plc (THRE) 

All lights appear green for THRE as it climbs up out of the flood-caused slough. It hopes that a change in rating agency will give it a more rapid upgrade of its rating and allow it to take on foreign clients again. It will also return to dividends with a small one on 2015. We continue to Buy but cut TP down slightly to Bt3.4 from Bt3.6.  

 

Reinsuring high-claim premiums to cut net premium growth. In July, THRE reinsured high-claim policies with other reinsurers. These are mostly health insurance for provincial teachers and are worth Bt1.3-1.5bn/year through 2019. THRE reinsured 85% of these; this will cut 2015F-2019F earned premiums by 20-25% but will be offset by a better combined ratio. Factoring in a lengthier economic slowdown than expected and a lower retention rate, we slash our 2015F earned premium growth for non-life reinsurance to -14% from 15%. Note that we forecast a 37% contraction in consolidated premium growth in 2015F, distorted by de-consolidation of THREL, whose life reinsurance premiums accounted for 26% of THRE’s total premiums in 2014. 

 

Improving combined ratio and CAR. Carving out the high-claim policies in July will improve combined and capital adequacy (CAR) ratios. We expect combined ratio to slip to 91% in 2015F (92% in 1H15) and 90% in 2016F from 94% in 2014 (excluding flood claims). Management expects the CAR to increase from 302% at 2Q15 to ~350% at YE2015 and >350% at YE2016, more than double the minimum requirement of 140%.  

 

Changing credit rating agency, hopes for upgrade. THRE switched to Fitch in 3Q15 after hiring A.M. Best Company to review its credit rating in 2Q15 in hopes of a more rapid rating upgrade to “A”, as A.M. Best requires at least one year to review its rating compared to 1-2 quarters for Fitch. THRE expects to be rated “A”, which would bring back reinsurance for international-owned insurers which it lost after the floods in 2011 led S&P to downgrade its credit rating to BBB+. By its estimates, this downgrade led to a loss of ~Bt800mn in premiums from foreign-owned clients. An increase in CAR to >300% by reducing its holding in THREL to 25% in 1Q15 should bring back its “A” rating.  Dividend on 2015. THRE cleaned out retained losses in 2Q15 by using premium on shares and it can resume paying a dividend. However, we expect a very small dividend on 2015F of only Bt0.05/share, assuming an 8% payout ratio (30% of core earnings). 

 

Smooth succession. 46-yearold Oran Vongsurapichet, currently president and Chief Operating Officer, has been appointed as CEO to succeed Mr. Surachai Sirivallop as of January 1, 2016. Mr. Surachai Sirivallop will move to Executive Committee Chairman. 

 

Starting actuary service in October. Its client targets are insurance companies, which are required by the OIC to have an actuarial sign off, and listed companies that need this service for calculation of employee benefit obligations. 

 

Maintain Buy with a slight cut in TP on THRE for: 1) turnaround in 2015 after clearing flood claims; 2) back to dividend on 2015 operations and 3) the possibility its credit rating will be upgraded to “A”, which will open the door to foreign-owned insurers. We cut target price slightly to Bt3.4 (18x PER for mid-2016) from Bt3.6.