Investment Highlights

• We maintain our SELL call on Tune Protect Group (TPG) with an unchanged fair value of RM0.25/share based on FY21 P/BV of 0.3x, supported by an ROE of 5.6%. We have rolled over our valuation to FY21.
• TPG reported a higher net profit (PATAMI) of RM13.0mil (+403.9% QoQ) in 2Q20. This was largely driven by higher fair value gains on investments (+RM17.6mil) from favourable swings in MGS yields, recovering from 1Q20 and realized gains on investments (+RM1.2mil). Also, it was contributed by lower net claims and net commission expenses in line with the lower premiums for the quarter. Excluding the fair value gains on debt securities, earnings were still weak for 2Q20.
• 2Q20 saw a higher reinsurance ratio of 61.9% to cede risk on non-motor insurance to reinsurers.
• 1H20 earnings of RM15mil declined 48.0% YoY contributed by lower net earned premiums (NEP) arising from the decline in travel PA insurance due to Covid-19 and a drop in fire and engineering insurance. Besides, the group recorded weaker share of profits from its associate (Tune Protect Thailand) and JV (Tune Protect EMEIA) attributed to the lower demand for travel insurance.
• Net profit for 1H20 was within expectation, accounting for 45.5% of our estimate. However, it beat consensus projection making up 70.0% of street numbers.
• Tune Protect Malaysia (TPM), its general insurance subsidiary, posted a higher profit of 18.0% YoY at RM20mil. This was attributed to lower net commission expenses, improvement in claims experience and decline in management expenses (advertising and marketing, staff cost, other admin and general expenses coupled with lower provision for impairment of receivables).
• TPG’s subsidiary Tune Protect Re (TPR), operating the travel insurance business, recorded a weak 2Q20. It was impacted by lockdown measures for air travel in its key markets due to the Covid-19 pandemic. April 2020 saw a substantial drop in travel PA which then recovered moderately in May and June 2020 with the opening up of domestic travel in selected markets. In Malaysia, domestic travelling was allowed in June 2020 after the movement control order (MCO) with the resumption of AirAsia’s operations. 1H20 profit of TPR slipped 56.9% YoY to RM9.6mil with a lower NEP of RM23.5mil.
   
• Group GWP fell by 11.5% YoY to RM215mil in 1H20. TPR’s GWP declined 59.1% YoY to RM19.1mil from a slowdown in travel insurance. AirAsia as well as AirArabia and B2B segments recorded lower travel insurance premiums. Meanwhile, GWP of TPM edged down by 4.2% YoY to RM198.9mil due to lower motor insurance partially offset by higher non-motor insurance mainly marine, hull and cargo classes of business. The mix of motor and non-motor insurance GWP for TPM was 23.0% and 77.0% respectively.
• Group combined ratio in 1H20 climbed to 99.3% vs. 95.1% in 1H19 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 42.2% and 50.6% respectively for 1H20. Commission expense ratio improved to 6.4% in 1H20 attributed to higher commission income and a decrease in commission expenses in tandem with the drop in premiums.
• Underwriting margins tumbled to 0.7% in 1H20 vs. 4.9% in 1H19, contributed by lower travel insurance demand which yields higher profits from the low claims experience.
• The outlook for the travel insurance and general insurance business continues to be challenging due to the outbreak of Covid-19. Despite the resumption of domestic air travel, consumers are likely to remain wary on travelling in the near to medium term. Also, with the second wave of the pandemic, most international borders for air travel remained closed, and this is likely to hinder the progress of recovery for travel insurance in the quarters ahead to be significantly better than what has been seen in May and June 2020. Even though countries like the United Arab Emirates and Oman have made travel and health insurance mandatory for all inbound passengers, the opening of international borders for air travelling remains key for a stronger recovery in demand for travel insurance. Meanwhile, growth of premiums for the general insurance is expected to remain muted with the slowdown in economy as a result of the virus.
• No dividends have been declared for quarter. With no dividends paid for FY19, we continue expect that there will also be no payouts in FY20.

Source: AmInvest Research - 3 Aug 2020