Investment Highlights

• We downgrade our call on Tune Protect Group (TPG) from BUY to HOLD with a lower FV of RM0.80/share (previously: RM1.10/share). This is based on a forward PB of 1.0x as we reduce our FY19 ROE estimate to 10.0% from 11.6% after trimming our net profit estimates. Following a weaker-than-expected performance, we cut our earnings for FY18/19/20 by 12.9%/16.3%/23.3% by reducing our retention ratio assumptions and raising our estimates for management expense ratio.

• TPG reported a lower core earnings (PATAMI) of RM9.1mil in 3QFY18 (-28.7%QoQ). The decline was contributed by higher management expenses of RM12mil QoQ from its general and travel insurance businesses as well as lower underwriting profit of its subsidiary, Tune Protect Malaysia (TPM). TPM operates the general insurance business.

• The rise in management expenses (ME) was attributed to provisions for impairment losses on insurance receivables of RM4mil (RM2.2mil for its travel insurance business under Tune Protect Re (TPR)) which was required under the MFRS 9. Also, contributing to the increase in ME was higher employee, marketing, administration and general expenses.

• 9MFY18 net profit of RM39mil (+2.2%YoY) was flat. This was due the higher ME of TPR which partially offset the rise in profits of TPM. The group’s underwriting profit for 9MFY18 was subdued at RM18mil. Cumulative earnings fell short of expectations, accounting for 65.0% of our and 66.3% of consensus estimates respectively. The variance was largely due to the higher-than-expected combined ratio from an increase in ME, though its NEP was in line with our estimate.

• 9MFY18 saw a lower claims ratio of 36.2% vs. 43.2% in 9MFY17. This was contributed by the closure of timebarred claims on inward treaties to the amount of RM9.1mil and the release of IBNR reserves of RM9.8mil for 9MFY18 (9MFY17: RM0.9mil and RM7.6mil respectively). Meanwhile, management expense ratio climbed to 41.6% in 9MFY18 (9MFY17: 36.1%) while commission ratio rose to 13.9%. Combined ratio in 9MFY18 was higher at 91.7% compared to our full FY18 estimate of 90.0%. Hence, we have revised our projection for FY18 combined ratio to 92.0%.

• Management highlighted that 4QFY18 will be a challenging quarter for the group. Although ME is expected to improve in 4QFY18 from 3QFY18, it is anticipated that the expenses will still be high due to the provisioning for expected losses on its receivables.
• For the travel insurance business, profit after tax fell 5.8%YoY to RM33.0mil in 9MFY18 owing to higher impairment on receivables, facilitator fees and marketing expenses which increased its combined ratio to 64.4% (9MFY17: 59.6%). TPR’s 9MFY18 GWP grew 6.3%YoY riding on AirAsia which contributed 83.0% of the total travel insurance premiums.

• Meanwhile, for the non-AirAsia segment, the GWP for travel insurance climbed by 14.6%YoY, contributed largely by its Middle East JV. We understand that the product bundling initiative with AirAsia packages has contributed circa 8.0% of the travel insurance premiums in 3QFY18 and 9MFY18. Contribution from its partnership with Wataniya Airways to the group’s travel insurance premium is still low. Travel policies issued for the Asia and EMEIA markets rose by 52.0%YoY and 41.0%YoY respectively for 9MFY18.

• Profit after tax of TPM grew 12.7%YoY to RM19.3mil in 9MFY18 supported by stronger underwriting performance from a favourable prior years’ claims development and closure of time-bared claims. TPM's GWP rose modestly by 2.9%YoY underpinned by motor segment (+4.1%YoY) and non-motor (+2.2%YoY). TPM’s combined ratio improved to 96.8% for 9MFY18 (9MFY17: 98.5%). Contribution from MMIP to the group’s GWP and PAT decreased to RM1.4mil and RM0.05mil for 9MFY18 (9MFY17: RM1.7mil and RM2.7mil respectively)

• 9MFY18 saw a higher share of profit from its JV (Tune Protect EMEIA) by 143.0%YoY with an increase in GWP. Meanwhile, profits from its associate in Thailand operating the general insurance business recorded a lower profit after tax by 28.7%YoY as a result of a decline in investment income.

• The launch of dynamic pricing 2.0 has been delayed to December 2018. The group has launched its PA protection coverage for sports. It has partnered with Dax Venture, a property solution tech start-up to offer insurance protection to homeowners for tenant’s default and cover related losses.

• It is also in discussion with a property developer to provide insurance coverage for homeowners. Retakaful travel insurance has already been launched in 5 markets (Bahrain, UAE, Oman, Iraq, Lebanon). The group plans to extend this subsequently to Kuwait and Indonesia by 4QFY18.

Source: AmInvest Research - 16 Nov 2018