Investment Highlights

• We maintain our HOLD call on Tune Protect Group (TPG) and FV of RM0.72/share based on an FY20 ROE of 10.1%, leading to a P/BV of 0.9x. No changes to our estimates.

• TPG reported a higher lower core earnings (PATAMI) of RM11mil (-41.6% QoQ) in 2Q19 largely due to an increase in management expenses (ME) of RM8.5mil and higher net claims for fire and motor insurance. The rise in ME was due to additional provisioning for impairment losses on receivables of RM1.2mil, advertising and marketing expenses of RM2.6mil and employee cost of RM0.3mil. In July, management highlighted that a portion of the RM1.2mil provisioning for the impairment losses on receivables has been recovered.

• 6M19 earnings were flat at RM29mil (-0.8% YoY). Lower earnings of its subsidiary, Tune Protect Re (TPR) operating the travel insurance business, offset the stronger profits of Tune Protect Malaysia (TPM), general insurer and the higher share of profits from JV (Tune Protect EMEIA) as well as its associate in Thailand. TPM’s profit after tax in 6M19 rose by 21.8% YoY to RM16.2mil owing to lower claims from a rebalanced portfolio towards a higher mix of non-motor insurance and marked-to-market gains on investment. Excluding the RM4.1mil inward treaty reserve release in 6M18, core earnings of the group grew almost 15.0% YoY in 6M19. 6M19 earnings were within expectations, making up 51.8% of our and 46.8% of consensus estimates.

• Group GWP decreased by 17.2% YoY to RM242.9mil in 6M19 due to subsidiary, Tune Protect Malaysia’s (general insurer) rebalancing of portfolio, coupled with the lower premiums from TPR. TPR’s GWP fell due to the increase in retention ratio from 20.0% to 50.0% of the Malaysian market travel premiums by TPM.

• TPR’s net profit slid by 25.7% QoQ to RM9.5mil in 2Q19. The decline was mainly due to higher management expenses of RM4.2mil which included RM1.2mil provisions for impairment losses on receivables required under the MFRS 9. For 6M19, the subsidiary’s PAT was down by 10.2% YoY to RM21.7mil. TPR’s 6M19 GWP and NEP slipped 17.9% and 14.7% YoY to RM10.2mil and RM8.1mil respectively due to the change in retention ratio for travel insurance in Malaysia as mentioned. Underlying GWP declined by 6.0% YoY in 6M19. On a reported basis, GWP from the AirAsia segment shrank by 15.4% YoY in 2Q19. However, after adjusting for the change in retention ratio, the normalized GWP from AirAsia registered a smaller decline of 2.5% YoY in the quarter.

• Dynamic Pricing phase 2.0 has been implemented in 4 markets — Thailand, Singapore, Indonesia and Malaysia. The group is still targeting an incremental revenue of 4% for the first year from this initiative. We gather that in the 2Q19, the new phase of Dynamic Pricing has only contributed a marginal 3.0% of total AirAsia’s comprehensive travel insurance policies. Meanwhile, on product bundling with AirAsia’s travel products, this initiative has contributed 10.0% or circa RM2mil in premiums to TPR’s total GWP of RM23.5mil in 2Q19, and stayed insignificant in our opinion. On the partnership with PT Asuransi Buana Independent (ABI) and the Association of Indonesian Tours and Travel Agencies East Java (Asita East Java) for travel insurance business, we understand the contribution to the group’s revenue from the collaboration is still minimal at this juncture.

• Group combined ratio in in 2Q19 climbed to 108.6%, underpinned by higher claims and management expense ratio. For 6M19, the TPG’s combined ratio surged to 95.1% vs. 86.8% in 6M18 due to the increase in management expense and net commission ratios from a lower NEP while claims ratio improved to 34.6% from 38.3% in 6M18.

• Combined ratio for TPR was higher at 67.4% in 6M19 vs. 59.7% in 6M18 while that of TPM climbed to 120.6% (6M18: 104.6%) due to lower NEP from ceding motor premiums to reinsurers to mitigate the high claims for the segment. The mix in non-motor premiums rose to 66.0% of the total GWP of TPM while motor premiums made up the remaining 34.0% in 2Q19. The group maintains its target for TPM’s mix of nonmotor to motor premiums of 70.0%:30.0% by the end of FY19.

• 6M19 saw a higher share of profit from its JV (Tune Protect EMEIA) by 73.3% YoY to RM851mil with an increase in premiums in the Middle East markets contributed by AirArabia and its B2B segment. Meanwhile, the share of profits from its associate in Thailand operating the general insurance business surged by 110.5% YoY to RM1.6mil. Contributing to the improvement was an increase in GWP from travel, personal accident and fire insurance coupled with fair value gains on investments.

• No dividends have been declared in 2Q19.

• TPG has entered into a digital partnership with BaoViet, a state-owned general insurer which is the largest in Vietnam for the latter to distribute travel insurance through the group’s platform. This partnership will generate technology fee income for TPG. In Thailand, a partnership has been inked with Srikrung which operates an online platform called 724 insure to be its agent for the distribution of the group’s travel insurance products. In addition, a collaboration has also been formed with TieThai in Thailand to sell travel insurance products through mobile apps.

• The outlook for the travel insurance and general insurance business continues to look challenging. Normalised travel insurance premiums still showed a decline despite adjusting for the higher retention rate change in the AirAsia Malaysia outbound travel business. Thus far, contribution from the initiatives from product bundling and Dynamic pricing have been marginal in addressing the decline in travel insurance premiums. In addition, we continue to see a challenging operating environment for the general insurance business with detariffication impacting fire and motor insurance resulting in premiums to be more price competitive. Underwriting margins have been declining significantly for the group.

Source: AmInvest Research - 22 Aug 2019