We now expect Tune Protect to see a stronger earnings delivery over 2018-20E, subsequent to a weaker year in 2017. Positive factors include a recovery in its digital global travel business and improved underwriting profit driven by lower net claims (from motor) and better collection of receivables. New initiatives in the pipeline include Dynamic Pricing 2.0 and the roll-out of new initiatives under its partnership with an Insurtech firm. We reiterate our BUY rating with a revised Target Price of RM1.20 (from RM1.00) after raising our 2018- 20E earnings by 7-22.7% and applying a higher P/BV multiple.

2018-20E Are Potentially Recovery Years After the Weak 2017

Compared to 2017, which saw its core net profit suffer a 40% decline yoy arising from the high motor claims liabilities, adverse effects of the “Opt-in” regulatory changes and higher marketing expenses, we believe that the 2018-20E period will be potentially recovery years. This will likely be driven by new partnerships, development of new digital platforms coupled with product innovation and introduction, cost-control measures, more digital initiatives and expansion of presence into other countries.

Raising Our Earnings for 2018-20E by 7-23%

We are raising our net profit for 2018E/19E/20E by +7.0%/+20.8%/+22.7%. Though there were topline revisions on gross written premiums and net earned premiums, more importantly, a lower net claims ratio and lower commission ratio were the key drivers to our earnings revisions.

Dynamic Pricing 2.0 May Potentially Boost Sales by 5-20%

The Dynamic Pricing 2.0 with an ‘Artificial Intelligence’ feature (to identify specific needs based on age, medical history, etc) is expected to be integrated seamlessly into AirAsia’s website, expected by end-2018.

Reiterating Our BUY Call, Raising TP to RM1.20, From RM1.00

We reiterate our BUY call. We believe that the earnings outlook in 2019-20E is increasingly more promising on the back of stronger revenue growth arising from initiatives to boost digitization (which includes global travel and motor insurance) and potentially lower net claims. Hence, we raise our 12- month Target Price from RM1.00 to RM1.20 (now based on a higher P/BV target of 1.45x 2019E, from 1.35x). Key downside risks include a sustained decline in its travel insurance segment and sticky motor claims ratio.

Ambitious Plans Through Product Differentiation

Leveraging on Its Nimble and Scalable Business Model

To recap, the Tune Protect Group (listed in 2012) leverages on a nimble and scalable business model, whereby the low-cost capital travel insurance operations is projected to make up the bulk of its underwriting profit (projected at circa 70-76% for 2018-20E), while the balance should be driven by its Malaysian general insurance operations.

2018-20E Are Potentially Recovery Years After a Weak 2017

Compared to 2017, which saw Tune Protect’s core net profit suffer a 40% yoy decline arising from its high motor claims liabilities, the adverse effects of the “Opt-in” regulatory changes on its premium growth and higher marketing expenses, we believe that the 2018-20E period will be comprised of potentially recovery years. This will be driven by new partnerships with airlines/car dealers to promote Tune’s insurance products, introduction of Insurtech ideas, development of new digital platforms coupled with product innovation and introduction, cost-control measures (through panel workshop management), revised underwriting terms, more digital initiatives (claims processing, underwriting) and expansion of presence into other countries.

Earnings Increases for 2018-20E by 7.0-23%

As we are turning more upbeat on Tune Protect’s outlook, we are raising our net profit for 2018E/19E/20E by +7.0%/+20.8%/+22.7%. Our revisions are underpinned by:

i) Topline revision in terms of gross written premiums (GWP), whereby we forecast a growth rate of between 6-8% p.a. against our previous assumptions of 1.5-1.9% p.a.;

ii) Nonetheless, for net earned premiums (NEP), we expect 2018E to see a minor dip of 2.9% yoy due to a lower retention ratio of 43% for the general insurance segment vs. 47% in 2017, hence, leading to a higher level of premiums ceded out to other reinsurers. For 2018-20E, we also factor-in a retention rate of 43% for the general insurance segment. Meanwhile, for the global digital insurance business (which falls under Tune’s reinsurance division), we are maintaining a high level of retention rate at 99%. Our overall retention ratio for 2018-20E has been revised down to c.54-55%, from 62-63% previously;

iii) Most importantly, our overall combined ratio for 2018-20E has been revised down from 91-92% to 84-86% driven by our lower net claims ratio assumptions at 37-39% (from 43-44% previously) as well as a lower commission ratio at 13-14% (from 16% previously). We believe that going forward, Tune may potentially see a lower net claims ratio (from the general insurance segment, motor in particular) arising from the positive results of lowering the retention ratio (higher amount of premium ceded to reinsurers), redirecting claims to their panel workshop, better collection, more favourable prior year claims development and improved underwriting standards.

iv) On dividends, we now factor in a payout ratio of 50% for 2018-20E. As such, on a dividend per share (DPS) basis, there has been some downward revision from 5.5 sen to 4.0-5.1 sen for 2018-20E.

Dynamic Pricing 2.0 May Potentially Boost Sales by 5-20%

Based on the Dynamic Pricing 1.0 launched earlier, the focus was on pricing the travel insurance policies based on demography, geography and airline ops. A similar strategy will be applied for Dynamic Pricing 2.0 as well, but with added features such as an Artificial Intelligence (AI) feature to track the type of insurance requirements that suit a traveler’s needs. This is to be determined by age (infants, kids, adults or elderly), medical history (history of heart attack, asthmatic, etc), destination and type of holidays (high risk/low risk). This ‘AI’ feature is expected to be integrated seamlessly into AirAsia’s website, expected by end-2018. In the meantime, an IT company has been engaged to look at identifying these probabilities. We understand that from Tune’s track record of optimization initiatives with airlines partners, its travel insurance sales saw an increase of 5-20%.

Pay-as-you-drive App – Still a Challenge for Malaysians to Embrace

Tune Protect’s management is currently looking at the introduction of a i) Pay-as-you-drive App (based on mileage driven); and ii) Pay-as-how-youdrive App (based on customer’s driving behaviour). Management is more keen to work on the Pay-As-You-Drive model, as it utilises a straightforward measure and is easier to track. However, it is still a challenge in Malaysia as it is thought of as an invasion of privacy (due to the installation of a tracking device in the driver’s car).

Valuation & Recommendation

Reiterate BUY Call, Target Price Raised to RM1.20 (from RM1.00)

In tandem with the upward revisions to our 2018-20E earnings for Tune, we also raise our 12-month Target Price from RM1.00 (based on a P/B target of 1.35x 2019E BVPS of RM0.74) to RM1.20 (based on a 1.45x P/BV target on our revised 2019E BVPS of RM0.82) underpinned by our assumptions of a 2019E ROE of 12%, growth rate of 5% and cost of equity of 9.8%. We reiterate our BUY rating on Tune Protect. Though the implied 5-year P/BV multiple average stood at 2.4x, with a range from as low as 0.92x to as high as 4.1x, our target valuation of 1.45x (derived from our Gordon Growth Model) is at set a 1-SD below the past-5-year mean. Our target price of RM1.20 implies an upside potential of 31.3%. We however, believe that there may be constraints for investors to value the stock at higher multiples due to the structural change in the industry arising from the implementation of the ‘Opt-in’ ruling by MAVCOM since 2H16.

Outlook in 2H18 – Premium Growth Intact; New Initiatives on the Cards

For 2018E, we expect the bulk of GWP to be underpinned by Malaysia’s general insurance business (80% of GWP), while the rest is to come from digital global travel insurance (~10%). Nonetheless, at the profit-after-tax line, we estimate that about 55% will be driven by the digital global travel insurance segment. In our view, there may not be major unforeseen circumstances in the travel industry as well as the Malaysian general insurance market (motor, fire, marine/aviation/transport) that may drive down premium growth or a major calamity that could cause a spike in claims. As Tune potentially introduces more innovative and new products into the market (working out a business model through a partnership with Laka Ltd from the UK), we believe that this will bring in additional revenues to the group. Though the domestic general insurance market remains challenging and competitive, we do not see significant pricediscounting under the detariffed market (for motor and fire) in Malaysia. The key downside risks to our call would be a decline in air travel, price competition, spike in claims, higher fraud cases and weaker premium growth.

Source: Affin Hwang Research - 14 Aug 2018