Investment Highlights

• We downgrade our call on Tune Protect Group (TPG) to SELL from HOLD with a lower fair value of RM0.25/share (previously RM0.48/share) based on FY20 P/BV of 0.3x, supported by a lower ROE of 5.8%. We trim our FY20/21/22 earnings by 35.2%/37.8%/35.9% to reflect lower premiums from travel insurance and a reduced estimate for investment income and share of profit from associates.

• TPG reported a lower core earnings (PATAMI) of RM2.5mil (-86.4% YoY) in 1Q20 largely driven by a significant drop in travel insurance demand and unrealised losses on investment (fixed income securities) of RM6.4mil.

• Net profit in 1Q20 was below expectations, accounting for 4.9% of our and 5.8% of consensus estimates.

• Tune Protect Malaysia (TPM), its general insurance subsidiary, posted a much lower profit after tax of RM0.5mil (-95.3% YoY) due to unrealised investment losses of RM14.7mil and higher unearned premium reserve for engineering insurance of RM2.2mil. We understand that the unearned reserve will be gradually released, and it will not impact its FY20 earnings.

• The share of profit from its overseas venture shrank. It was impacted by lower travel premiums by AirArabia and the B2B segment due to the outbreak of the Covid-19 pandemic, hence affecting the earnings of Tune Protect EMEIA (JV entity). 1Q20 saw a share of loss of RM1.95mil from its associate Tune Protect Thailand due to unrealised losses on investments.

• TPG’s subsidiary Tune Protect Re (TPR), operating the travel insurance business, recorded a drop in after tax profit by 37.8% YoY to RM7.8mil. This stemmed from a lower demand for travel insurance in Asia and the Middle East. It was also due to the change in the retention ratio on travel premiums in TPR and TPM for the Malaysian market’s travel insurance from 50%:50% to 35%:65%.

• Group GWP slipped by 3.8% YoY to RM113.2mil in 1Q20. This was due to TPR’s lower GWP of 22.9% YoY at RM17.8mil from a slowdown in travel insurance. Normalised GWP of TRP, excluding the change in retention ratio in TPR and TPM for the Malaysian market’s travel insurance premium declined 16.8% YoY. AirAsia remained a significant contributor to TPR’s GWP at 78.0% while contribution from the recent partnership with Salam Air was a meagre RM0.4mil in the 1Q20.
• Meanwhile, GWP of TPM edged down by 2.0% YoY to RM98.2mil due to lower motor and travel personal accident insurance. The mix of motor and non-motor insurance GWP for TPM was 34.0% and 66.0% respectively.
• Group combined ratio in 1Q20 climbed to 95.3% vs. 82.0% in 1Q19 underpinned by lower NEP, largely from the drop in travel premiums and lower retention ratio. Arising from the decrease in NEP, the group’s claims ratio and management expense ratio rose to 39.2% and 42.5% respectively. Commission expense ratio improved slightly to 13.6% in 1Q20.

• Underwriting margins tumbled to 4.7% in 1Q20 vs. 18.0% in 1Q19.

• Outlook for the travel insurance and general insurance business continues to be challenging due to the outbreak of Covid-19. We expect the impact to the decline in travel insurance’s demand to be more pronounced in 2Q20. This is due to the full quarter’s impact of the movement control order (MCO) which imposed restrictions on domestic and international travel, hence affecting the demand for travel insurance. Even when the MCO is lifted, we do not foresee air travel demand to recover back to the pre-Covid-19 levels as consumers are likely to remain cautious on travelling in the near to medium term. Also, there remains to be seen whether there will be a second wave of the pandemic.

• Meanwhile, growth of premiums for the general insurance sector is expected to remain lukewarm with the slowdown in economy. Transactions for purchase of properties and vehicles continue to be seen as soft in the near term. This will impact demand for fire and motor insurance.

Source: AmInvest Research - 27 May 2020