Investment Highlights

• We maintain our SELL call on Tune Protect Group (TPG) with a revised fair value of RM0.30/share from RM0.25/share based on FY21 P/BV of 0.4x (previously 0.3x), supported by an ROE of 5.6%. We ascribe a lower risk premium with modest improvement in its subsidiary Tune Protect Re’s (TPR) earnings, coupled with the group’s plans to gradually diversify from travel insurance and lower its reliance on AirAsia for travel premiums.
• Our FY20 net profit estimate has been lowered by 20.1% to reflect a lower net earned premium (NEP). We make no changes to our FY21 and FY22 earnings forecast.
• TPG reported a net profit (PATAMI) of RM2.3mil (-81.9% QoQ) in 3Q20. On a QoQ basis, the weaker earnings were contributed by lower fair value gains on investments of RM6.6mil, a drop in reinsurance commission income of commercial risk and higher management expenses (ME). ME were higher in 3Q20 compared to 2Q20 due the recognition of a RM1.4mil impairment for reinsurance recovery, a non-repeat of 2Q20’s reversal in provisions for personal expenses and additional marketing expenses allocated for the launch of its mobile application in Malaysia.
• It was also contributed by the share of losses from its associate (Tune Protect Thailand) due to weaker investment performance and the decline in share of JV (Tune Protect EMEIA) profits as a result of higher reserving for potential Covid-19 claims.
• 3Q20 saw a lower reinsurance ratio of 56.8% to cede out the risk on non-motor insurance to reinsurers. This was due to the absence of the sizeable renewal of commercial risk which occurred in 2Q20.
• 9M20 core earnings of RM17.4mil slipped 54.3% YoY attributed to lower NEP and share of profits from its associates (Tune Protect Thailand) and JV (Tune Protect EMEIA). NEP was affected by lower non-motor insurance and travel PA insurance due to the Covid-19 pandemic.
• Cumulative earnings were below expectations, accounting for 52.7% and 66.2% of our and consensus estimate respectively. The variance to our expectation was largely due to lower premiums and higher management expenses.
• Tune Protect Malaysia (TPM), its general insurance subsidiary, posted a lower profit by 4.1% YoY at RM23.9mil. This was attributed to the decline in NEP from the travel segment and non-motor segment arising from lower retention of the latter’s premiums. Besides, the weaker performance was also contributed by the decrease in fair value gains from investments of RM6.2mil.
• TPG’s subsidiary TPR, which operates the travel insurance business, recorded only a modestly improved profit after tax of RM2.6mil in 3Q20 vs. RM1.6mil in 2Q20 contributed by the need to pay out commission/facilitation fees for travel premiums in the Middle East market. This was despite the pick-up in gross written premiums (GWP) of TPR to RM11.4mil in 3Q20 compared to RM1.3mil in 2Q20. The improvement in GWP was contributed by the easing of travel restrictions in Malaysia and Thailand, coupled with the reopening of borders for the Middle East which benefitted the top line of B2B segment. In Thailand and the Middle East, for inbound travels, passengers were encouraged to take up travel and health insurance. The group has recently established a new tie-up for travel insurance with Bamboo Airways, a Vietnamese airline.
• 9M20 profit after tax of TPR declined by 61.8% YoY to RM11.9mil, impacted by lockdown measures for air travel in the key markets due to Covid-19 in the 2Q20. Recall, April 2020 saw a substantial drop in travel PA which then recovered gradually starting in May 2020 with the opening up of domestic travel in selected markets.
• Group GWP fell by 16.0% YoY to RM293mil in 9M20. TPR’s GWP declined 56.5% YoY to RM30.4mil from a slowdown in travel insurance. AirAsia and the other segments recorded lower travel insurance premiums. Meanwhile, GWP of TPM slipped 9.6% YoY to RM266.7mil due to lower motor insurance partially offset by marginally higher non-motor insurance. The mix of motor and non-motor insurance GWP for TPM stood at 31.0% and 69.0% respectively.
• Group combined ratio in 9M20 climbed to 106.5% vs. 97.4% in 9M19 contributed by lower NEP. Arising from the decrease in NEP, the group’s claims ratio and management expense ratio rose to 41.0% and 56.0% respectively for 9M20. In contrast, commission expense ratio improved to 9.5% in 9M20 attributed to the decrease in commission expenses in line with the lower premiums.
• Underwriting profit fell to -RM9mil in 9M20 vs. RM5mi in 9M19. This was contributed by lower travel insurance demand as well as competitive pricing pressure on corporate accounts.
• Challenges remain on travel insurance in the near term with the surge in Covid-19 cases globally. It is unlikely to see countries fully opening up their borders for international travel any time soon. Passengers are likely to remain wary on travelling in the near to medium term until the commercialization and sufficient distribution of successfully proven vaccines for global demand to prevent the spread of the pandemic. For Malaysia, a key market for travel insurance, the commercialization of the vaccines on local shores is seen as only likely in 2H2021.
• Earlier, the Inland Revenue Board has raised additional taxes and penalties totalling RM11.1mil on TPM. In the latest development, we understand that RM7mil of that amount has been settled without requiring the subsidiary to pay as PRAD (the provision of risk margin for adverse deviation) expenses have been determined to be allowed for deduction of taxes. This leaves circa RM4mil of additional taxes on other items which are still in dispute. TPM intends to appeal against the additional tax assessment through court proceedings. Thus far, the group has yet to make any provisions for the RM4mil additional taxes.
• There remains a lack of visibility on the group’s earnings and dividend payouts. With the new CEO on board, the focus of the business moving forward will on three pillars – insurance for lifestyle, health and SMEs. The intention to diversify from travel insurance and to reduce its dependency on AirAsia for travel PA (TPA) is positive in our view if the claims from the newly focused segments can be kept low. Not much details have been disclosed on the group’s new strategy at this time as TPG will be holding a briefing for analysts on the new strategic direction in Jan 2021.

Source: AmInvest Research - 23 Nov 2020