2Q14 profit was squeezed by a bigger commission ratio
THREL posted 2Q13 earnings of Bt90m, up 21% YoY but down 19% QoQ. The result was 9% below our forecast, due to a larger commission ratio than expected. 1H14 earnings rose 9% YoY to Bt201m, which represents 45% of our FY14 projection.
Premium revenue rose by 17% YoY and 5% QoQ to Bt374m, led by sales of non-conventional products. Note that THREL’s non-conventional premium revenue jumped by 136% YoY and 72% QoQ to Bt124m, while its conventional premium income declined by 7% YoY and 13% QoQ. The firm set provisions of Bt194m for its life policy reserve (loss ratio) in 2Q14, equal to 46.7% of total premiums (flattish YoY but up from 30.4% in 1Q14, due to seasonality). Significantly, its commission ratio rose to 35.9% in the quarter from 33.2% in 1Q14 and from 25.6% in 2Q13. As such, THREL’s combined ratio was 70.7%, up from 63.5% in 1Q14 (but down from 72.1% in 2Q13, due to a lower loss ratio).
ROI was 3.4% in 2Q14 (basically flat QoQ) in tandem with trends in the money market and the SET. Investment income was Bt15m, up 26% YoY, due to investment asset expansion and a higher investment gain on the stock market.
We expect THREL to deliver strong YoY net insurance premium revenue growth for 3Q14, led by seasonality (conventional re-insurance clients normally renew or buy new premiums during the second-quarter). Sales of non-conventional products should see good growth through the year.
Our earnings forecasts of Bt450m for FY14 (up 18% YoY) and Bt510m (up 13% YoY) for FY15 stand unchanged.
THREL’s long-term earnings outlook is good. There is scope for upside to our profit forecasts from a lower combined ratio and/or greater premium revenue than assumed. However, the prevailing share price of Bt14.70 implies a stretched valuation—our economic value estimate is Bt13.6/share (embedded value of Bt3.41 + VNB of Bt10.23). We maintain our HOLD rating. At the moment, we believe that BLA offers a more favorable risk-reward proposition. We will attend THREL’s analyst meeting next week.