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Thai Reinsurance

Full flood reserves made, full turnaround coming BUY

Thai Reinsurance Plc

Full flood reserve done. A specialist Australian chartered loss adjuster assessed the total cost of the unsettled 2011 flood claims; this led to another Bt4.4bn in flood claim provisions in 3Q13, approved by insurance regulators and auditors. THRE has fully provisioned 80% of the flood claims, i.e. those it expects to be liable for; 20% is in three claims worth ~Bt3bn that it does not believe have sufficient proof of loss.

Return to profit in 4Q13. 4Q13 should be in the black after 3Q13's huge loss from flood claim provisions. Management expects 3% net premium (-1.5percent for non-life insurance and +31percent for life insurance) growth with a combined ratio of ~90% (98percent for non-life and 70percent for life) in 2013. Based on guidance, we forecast 4Q13 profit of Bt67mn vs. Bt3.2bn loss in 3Q13. We have lowered 2013F slightly to a loss of Bt2.8bn from Bt2.7bn to fine tune with the latest guidance. If we exclude the flood-related provisions, 2013F operating earnings would be ~Bt1bn (+40%) and without flood losses, there was a substantial improvement in combined ratio to ~90percent from 97% in 2012 from the shift in product mix to non-conventional insurance and life insurance. Combined ratio for non-life insurance is estimated to improve to 98% in 2013F from 103% in 2012. Combined ratio for non-life insurance is estimated to improve to an exceptionally good 70% in 2013F from 78% in 2012.

Full turnaround in 2014. We expect a full turnaround in 2014F after clearing out the flood-related issues in 2013. For 2014, THRE targets net premium growth of 15percent for non-life insurance, mainly non-conventional products, and at least 20percent for life insurance, translating a growth of at least 16% in total net premiums. To fine tune with the guidance and account for the impact of the political unrest, we cut our 2014F non-life premium growth to 10percent from 15% and our 2014F life insurance premium growth from 25% to 20%, working out to a 13% growth in total net premiums. Management expects further improvement in combined ratio for non-life insurance as a result of a continued shift in product mix toward non-conventional insurance (76% of total premiums at 3Q13). However, management expects limited improvement in combined ratio for life insurance after the exceptional good level of 70percent for 2013.

Recapitalization? = Distant risk, and only for business expansion. The hefty flood loss reserves shrank its capital adequacy ratio (CAR) from 189% at 2Q13 to 160% at 3Q13, close to the 140% minimum required. The dilution in its holding in THREL from 100% to 51%, however, reduced the concentration risk charge under the Risk Based Capital (RBC) rules. Thus, THRE estimates its current CAR at ~200%. A strong earnings turnaround in 2014 will further enhance CAR. We see no immediate need for recapitalization but it could make a capital call if it desires to expand sometime in the next few years. In our view, this would not necessarily mean a material dilution to ROE and EPS, as the business expansion would provide recompense.

Maintain Buy but cut TP. Our BUY is backed by: 1) 2014 turnaround after taking the flood claims fully into account in 2013; 2) steadily 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. Two factors lead to a cut in TP to Bt4.3 (2.8x 2014F BVPS plus Bt1.04 for unrealized investment gain on THREL at TP of Bt13) from Bt5. 1) We cut 2013F by 13% and 2015F by 9% to bring them in line with guidance and include the potential impact from political unrest. 2) We de-rate its PBV target to discount a reduction in its CAR.

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