Thai Reinsurance
4Q15: In line with estimates BUY
Thai Reinsurance Plc
As expected, 4Q15 net profit surged 154% YoY and 23% QoQ to Bt155mn. Net underwriting income picked up 5% QoQ but fell 40% YoY after ceding high-claim policies (health insurance for provincial teachers) in 3Q15. Its combined ratio improved 125 bps QoQ to 94.65% on easing loss ratio (-150 bps QoQ) and commission ratio (-281 bps QoQ). Return on investment fell 124 bps QoQ to 2.72%, mainly due to lower bond yield.
Potential new clients and improved combined ratio. We estimate 18% growth in core earnings (excluding extra gain on the sale and marking-to-market of its investment in THREL) in 2016F. We lower our 2016 net premium forecast to 12% from 15%. We believe THRE will be able to sign on new clients from foreign-owned companies after returning to an “A-” credit rating in 4Q15 once it upped its CAR to >300%, qualifying it as a reinsurer for foreign-owned clients. We expect combined ratio to improve to 91% in 2016 from 93% in 2015 after ceding the high-claim health insurance policies for provincial teachers in 2015.
Further divestment in THREL. THRE is considering a further reduction in its holding in THREL to below 20% from 24.83% now in order to avoid treating THREL as an associated company, which carries a high capital charge. The main reason is to sustain its capital adequacy ratio above 300%. This is not yet in our forecast.
Maintain Buy and slice TP. We reduce TP to Bt3.3 (17x 2016F EPS) from Bt3.4 after lowering earnings forecast by 11%. We maintain Buy on expectation of: 1) new clients now that it is qualified to be a reinsurer for foreign-owned clients; 2) improvement in combined ratio after ceding high-claim policies in 2015; and 3) resumption of dividend payment in 2016.
