Investment Highlights

• We maintain our HOLD call on Tune Protect Group (TPG) with a reduced fair value of RM0.62/share from RM0.72/share with an FY20 P/BV of 0.8x, supported by a lower ROE of 9.3%. We trim our earnings by 9.2%/8.9%/8.7% to RM51mil/RM56mil/RM59mil by adjusting our forecast for gross earned premium and raising our projection for net commission ratio to 16.0% from 14.0%.

• 3Q19 saw TPG posting a lower core earnings (PATAMI) of RM9mil (-16.1% QoQ) after stripping out an off-gain from the disposal of property net of tax of RM2mil.

• For 9M19, the group reported a net profit of RM40mil (+4.3% YoY). Tune Protect Malaysia (TPM), the general insurer, reported a stronger profit while the share of profit from its associate in Thailand rose. Nevertheless, these improvements were partially offset by lower earnings from its subsidiary, Tune Protect Re (TPR) operating the travel insurance business as well as a decline in share of profits from its JV (Tune EMEIA).

• Excluding the RM6.9mil inward treaty reserve released in 9M18 and the gain in sale of property of RM2mil in 9M19, core earnings of the group grew 20.3% YoY. 9M19 normalised earnings of RM38mil were below expectations, making up only 67.9% of our and 61.4% of consensus estimates.

• Group GWP declined by 16.0% YoY to RM349.1mil in 9M19. This was due to TPM’s rebalancing of portfolio towards a lower mix of motor insurance exiting from the franchise business as well as a slowdown in non-motor premiums (travel, non-renewal of some project risk and the replacement of foreign worker workmen compensation business by Socso) from the general insurance subsidiary. Also contributing to the decline was TPR’s lower GWP.

• TPR recorded a higher net profit by 8.1% YoY to RM9.6mil in 3Q19 supported by lower management expenses and net commission expenses. However for 9M19, the subsidiary recorded a decline in PAT by 5.3% YoY to RM31.1mil contributed by lower top line. TPR’s 9M19 GWP and NEP fell 18.4% YoY and 15.0% YoY to RM69.9mil and RM71.1mil respectively due to the increase in the retention ratio from 20.0% to 50.0% of the Malaysian market travel premiums by TPM. Underlying GWP for TPR slipped 4.6% YoY to RM81.7mil in 9M19 largely due to lower premium for travel insurance from the AirAsia segment despite better premium growth YoY in 3Q19 from Thailand and Philippines, the 2nd and 3rd largest market. This has been impacted by the changes in AirAsia’s website layout, causing lower demand for travel insurance. The group is trying to address this shortcoming by rolling out pop-up notifications on the website to remind customers who have not selected the travel protection. We understand that this is still in the testing stage before the official implemention.

• We understand that in 3Q19, the new phase of dynamic pricing has contributed 6.0% of the total AirAsia’s comprehensive travel insurance policies compared to 3.0% in 2Q19. Meanwhile, on product bundling with AirAsia’s travel products, this initiative has contributed 10.0% or circa RM2.4mil in premiums to TPR’s total GWP of RM23.3mil in 3Q19 which remains insignificant.

• Group combined ratio in in 3Q19 improved to 102.1% vs. 108.6% in 2Q19 underpinned by lower management expenses. For 9M19, TPG’s combined ratio was higher at 97.4% vs. 91.7% in 9M18 mainly attributed to higher net commission and management expense ratios.

• Combined ratio for TPR improved to 60.7% in 9M19 (9M18: 64.4%) while that of TPM rose to 105.2% (9M18: 96.7%) contributed by lower NEP from ceding motor premiums to reinsurers to mitigate the high claims for the segment and the decline in NEP from non-motor insurance. The mix in non-motor premiums rose to 58.0% of the TPM’s total NEP while motor premiums made up the remaining 42.0% in 9M19. This compared to non-motor mix of 51.0% and motor composition of 49.0% in 9M18.

• 9M19 saw a lower share of profit from its JV (Tune Protect EMEIA) by 46.0% YoY to RM896mil due to lower premiums contributed by AirArabia with the implementation of the opt-in policy for ancillary products. However, this was partially mitigated by a higher premium contribution from the B2B segment. Meanwhile, the share of profits from its associate in Thailand operating the general insurance business rose by 41.3% YoY to RM2.5mil. This improvement was due to fair value gains on investments and growth in travel insurance business.

• In Vietnam, apart from entering into a digital partnership with BaoViet, a state-owned general insurer which is the largest in Vietnam, for the insurer to distribute travel insurance through the group’s platform, TPG has also signed a treaty with MIC to provide insurance coverage for flight delays. We gather that takaful travel insurance protection is now available for all AirAsia flights departing from Indonesia. Meanwhile, the group has enhanced its fire detariff pricing in 3Q19 by making adjustments to its own pricing model based on feedbacks.

• The outlook for the travel insurance and general insurance business continues to look challenging. Normalised GWP for TPR is still showing a drop in travel insurance premiums from the AirAsia segment despite adjusting out the higher retention rate change in the AirAsia Malaysia outbound travel business. Contribution from the initiatives from product bundling and dynamic pricing continued to be minimal in addressing the decline in travel insurance demand. In addition, we continue to see a challenging operating environment for the general insurance business with the detariffication of fire and motor insurance compressing margins.

Source: AmInvest Research - 22 Nov 2019