Investment Highlights

• We maintain our HOLD call on Tune Protect Group (TPG) with a revised fair value of RM0.69/share from RM0.68 based on an FY19 ROE of 10.2% leading to a P/BV of 0.9x. We tweaked our FY19/20 net profit by -5.1%/-1.6% after adjusting our assumptions for the combined ratio.

• We expect the group’s combined ratio to remain elevated in FY19. While initiatives have been implemented for its travel insurance business, the improvements were offset by higher management expenses in FY18. This has resulted in a marginal contribution to the group’s earnings. Meanwhile, underwriting margins are expected to be under pressure due to other insurers’ travel insurance offerings at competitive pricing. Also, fire insurance margins could be lower ahead with the potential full liberalization for fire products.

• The income tax authority, LHDN has raised RM11.1mil additional taxes and penalties on its subsidiary, Tune Protect Malaysia (TPM) in Dec 2018. This was for the 2013–2015 assessment years. The group is challenging the taxes through court proceedings.

• TPG reported a higher core earnings (PATAMI) of RM14mil after adjusting for VSS expenses of RM2.8mil net of tax in 4QFY18 (+48.9%QoQ). The improvement was attributed to a higher net earned premium after an increase in the retention ratio coupled with lower net claims. TPM, its subsidiary operating the general insurance business, completed its VSS exercise in 4QFY18.

• The group recorded a 12MFY18 core net profit of RM52mil (+13.2%YoY). This was due the higher normalized earnings of TPM (+5.4%YoY) after excluding the VSS cost, higher investment income and better income contribution from JV. Meanwhile, the other subsidiary, Tune Protect Re (TPR) which operates the travel insurance business, recorded a decline in net profit by 0.9%YoY to RM42.8mil. Recall in the previous quarter, TPR incurred impairment losses of RM2mil on receivables which had to be recognized under the MFRS 9. The impairments contributed to an increase in management expenses of RM8.3mil for the full FY18 of TPR. Also, the subsidiary incurred higher net claims by RM3.2mil and commission expenses by RM2.8mil. The group’s underwriting profit for 12MFY18 slipped by 10.0%YoY to RM17mil.

• Normalized cumulative earnings were in line expectations, accounting for 100.0% of our and 100.8% of consensus estimates respectively.

• 12MFY18 saw a lower claims ratio of 34.2% vs. 43.8% in 12MFY17. This was contributed by the closure of time-barred claims on inward treaties to the amount of RM9.1mil as well as higher quota share for motor insurance to de-risk its motor portfolio. Meanwhile, its management expense ratio climbed to 45.6% in 12MFY18 (12MFY17: 37.8%) while commission ratio rose to 14.4%.

• The combined ratio in 12MFY18 was slightly higher than the previous year at 94.1%, as well as higher than our full FY18 estimate of 92.0%.

• The travel insurance business recorded a higher combined ratio to 66.3% for 12MFY18 (12MFY17: 60.9%). TPR’s 12MFY18’s GWP grew 10.9%YoY, leveraging AirAsia which contributed 83.0% of the total premiums. Meanwhile, for the non-AirAsia segment, GWP for travel insurance climbed by 6.4%YoY, contributing 17.0% of the total travel insurance premiums. This was a slight increase from 13.0% in the previous year. Travel policies issued for the Asia markets climbed 39%YoY while that for the EMEIA markets surged by more than 100%YoY in 12MFY18. The group launched Dynamic Pricing 2.0 in 7 core markets – Malaysia, Thailand, Indonesia, Singapore, China, Hong Kong and Morocco – in 4QFY18.

• 12MFY18 saw a higher share of profit from its JV (Tune Protect EMEIA) by 130.0%YoY with an increase in premiums in the Middle East markets contributed by AirArabia and B2B. Meanwhile, the share of profits from its associate in Thailand operating the general insurance business fell by 27.2%YoY as a result of lower investment income. This was in line with the equity market performance.

• Normalized profit after tax of TPM grew 5.4%YoY in 12MFY18 supported by favourable prior years’ claims development and closure of time-bared claims. TPM's GWP declined by 2.2%YoY due to higher motor quota share and a drop in non-motor premiums (-2.0%YoY). In FY18, TPM ceded 60.0% of its motor premiums to reinsurers compared with 50.0% in FY17 to de-risk its motor portfolio. TPM ended 12MFY18 with a higher combined ratio of 101.8% for 12MFY18 (12MFY17: 99.7%). We believe that MMIP to the group’s GWP and PAT has dropped for 12MFY18 as the pool has been shrinking due to many insurers insuring motor insurance directly, taking advantage of the flexibility in pricing.

• TPM, also known as TIMB, was the reinsurer for an extended warranty programme for various models of vehicles. The reinsurer has failed to remit their share of payment to TIMB for claims paid. We gather that the amount owing by the reinsurer was RM6.27mil of which RM4.73mil has been impaired. TIMB is undertaking legal actions to recover the amount.

• The group has restructured its general insurance portfolio by introducing new products such as SMI fire which enabled a more flexible pricing to tariff rates to mitigate the detariffication impact. TPM has also launched a pay-on-demand motor insurance product as well as new products for foreign workers’ insurance. To mitigate the higher claims on motor insurance, apart from increasing the motor quota share, TPM has rationalized its cost, franchise dealers, agents and recalibrated its point of sale strategy. Aside from travel insurance, the group is also targeting premiums from other retail and on-demand products. As for retakaful travel insurance, it has gone live in Kuwait. This will be the group’s 6th market in the Middle East in addition to Bahrain, the UAE, Oman, Iraq, Lebanon. The group plans to extend the retakaful business to Indonesia in 1H19.

Source: AmInvest Research - 25 Feb 2019