First of all – who is THRE and what is their business?
THRE is a professional reinsurer which offers reinsurance coverage in all major property and casualty business lines, with particular expertise in property, casualty, engineering, marine and life customers. Its customers are mostly local life and non-life insurers and a selected number of customers in foreign markets. (source: SETSMART)
Firstly the key financials:
Mkt cap (Btbn) 12.57
# of shares: 3,512 mn
Latest Stock Price: 3.58
Why are they raising capital?
Simple, the floods in 2011 had hurt them badly, they are an insurance company after all and even though they have tried their best to constantly delay paying claims in the end it still has to be done, so with THRE now running out of funds, they have to raise capital just to ensure the company stays afloat.
The main reason for this capital call is to allow the transfer of Bt2.14bn in flood claim liabilities from two insurance companies to Fairfax Financial Holdings via its wholly-owned firm, TIG Insurance (Barbados) Limited (TIG). To transfer this liability it may be necessary, in accordance with Insurance Agreements, for THRE to pay some consideration to TIG. This will be negotiated but will not exceed Bt1.1bn. To transfer this liability, THRE must pay the transferee (TIG) cash equivalent to the liability plus servicing fee. Although they will argue that this is for the long term benefit of the firm to position themselves for the next 10 years of Thailand’s growth story, well of course its for the long term benefit, if they don’t do it they’re bankrupt or banned from doing business by the OIC (Office of Insurance Commission) because there is a requirement on the Maintenance of Risk Based Capital that requires insurance firms to have a minimum CAR ratio. Also just have a look @ their balance sheet, it’s a mess, negative retained earnings, shareholders equity declining, profitability ratios are awful.
How are they going to raise the capital?
THRE’s Board has just approved a capital increase with a ceiling of THB 2.11 bn (~702 mn shares)
The details are as follows:
351 mn new shares as an RO to existing shareholders at a 10:1 ratio, @ THB 3/share
351 mn new shares a PP to the major shareholder, Fairfax Financial Holdings (via its wholly-owned HWIC Asia Fund) @ THB 3/share
Who is this FFH?
Fairfax Financial is known to be the Canadian version of Berkshire Hathaway, so they must know what they’re doing. Plus the techgeek in me has been following their movements in Blackberry for the past 12 months and I love what they’ve done there.
So how does this impact its earnings/valuations?
I’m no expert on insurance company valuation, yes I can go through all the embedded value ratios etc etc but in the end, its a dilution of 20% to shareholders that don’t subscribe to the RO.
Is this actually good for the business?
Yes, its necessary, does it mean you should buy it, your own decision.
But essentially this is necessary for them 1) They need the capital to ensure that they can continue to operate in this industry in Thailand 2) Every broker will begin to pitch that it is a turnaround story (a la True?!) 3) Should no disaster hit them, well every insurance company makes bank when disasters don’t come. 4) This recap should in theory be their last one, if you can think long enough, at some point earnings are going to improve, at some point their negative retained earnings will be wiped out and then they can begin to pay dividends, so at some point this will be an interesting turnaround play.
Side Notes:
HWIC will ask the SEC to waive the tender offer requirement
On a side note; isn’t the whole point of buying insurance is to protect you for when a disaster hits and that you can get paid back, how on earth can THRE take nearly 3 years to pay back a client of theirs…insurance companies/industry you just have to love them
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