Thai Reinsurance

Final flood claim reserve in 3Q14. THRE will book the final Bt2.1bn reserve for all remaining three flood claims by Japanese firms in 3Q14. It has decided not to transfer the flood liabilities on two of these to TIG Insurance (which carried a fee of Bt1.1bn) and will instead handle this on its own, saving Bt53mn. We estimate a loss of ~Bt1.5bn in 3Q14 (vs. Bt154mn net profit in 2Q14 and Bt3.2bn net loss in 3Q13). This is far larger than our earlier forecast loss of Bt500-700mn but all three remaining flood claims will be cleared out rather than only two as earlier planned. We view this as positive as it will remove the flood claim overhang and our earlier fears of another recapitalization.   

Enough funds to handle reserve, but may have to cut THREL stake. THRE says it has completed the Bt2.11bn recapitalization in which it issued 702.5mn new shares at Bt3/share, 351.25mn of which were offered at rights and 351.25mn privately placed with major shareholder Fairfax Financial Holdings. It will use the funds for the final flood claim reserve in 3Q14. The amount raised is equal to the final flood claim reserve, keeping its capital adequacy ratio at 200% (vs.140% minimum requirement). However, the regulator is considering implementing the second phase of the risk-based capital requirement and this may pressure THRE to reduce its holding in THREL (50.83%), since this is a big drag on its capital adequacy ratio due to its high concentration risk. THRE says it may sell some THREL shares, if necessary, to manage its capital funds.

Credit upgrade would underwrite L-T growth. 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’) at which it qualified as a reinsurer, costing THRE ~Bt800mn in premiums from international clients. THRE expects to get its ’A’ rating back in 2016, opening the door to the international market again.

Accelerating top line growth. Clearing out the flood claims will allow 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 line products, particularly health and auto insurance, the last of which is a growing market, given Thailand’s aging population and low penetration. Then in 2016 non-life growth should be given a boost by the recovery of auto sales. THRE will also benefit from infrastructure buildup, selectively focusing on mass transit projects with limited exposure to control concentration risk. Then in 2017 the hoped-for return to ‘A’ credit rating will underwrite premium growth. It continues to target high 20% growth in life insurance in 2015. We expect a steady rise in net premium growth from 9% in 2014F to 13% in 2015F, 16% in 2016F and 19% in 2017F.

Resume dividend in 2016? THRE expects to be able to clean out retained loss in 2016 by using premium on shares plus a probable gain on sale of THREL. By our calculations, its Bt6.2bn share premium will not be enough to eliminate retained losses by 2016. To achieve this, it will have to realize gain on investment such as THREL. At yesterday’s close, it has an unrealized gain on THREL of ~Bt5bn.   

Switch to THRE from THREL. We like THRE for: 1) turnaround after clearing out flood claims and removal of recapitalization overhang; 2) better growth prospects on the economic recovery, a pick-up in domestic car sales and rising need for health insurance from demographic change; and 3) L-T upside from rating upgrade by S&P that would allow a return to the international reinsurance market. We maintain target price at Bt4/share (2x average 2015F BVPS plus Bt1.09 for unrealized investment gain on THREL). It may be wise to switch to THRE from THREL since THRE may be selling some of its holding and, at this time, THREL is fully valued (19x PER, 7x PBV for 2015F).