From TIH’s analyst briefing last Thursday, we identified a new catalyst for its online travel insurance business – managing the international travel protection needs of leading Filipino low-cost carrier, Cebu Pacific. In view of the carrier’s regional expansion and AirAsia's expectations of rising contribution from the Philippines, we raise our FY14 earnings forecast by 8.2%. Our new MYR2.15 FV is pegged to 20x FY14 EPS.

- Widens travel protection to other airlines. Tune Ins Holdings (TIH) has secured an exclusive five-year partnership with leading Filipino non-life insurer, Malayan Insurance Co (MICO), which manages the domestic travel protection needs of Cebu Pacific Air (CEB). Management guided that the earnings accretion from this deal will not be significant for FY13 as it will only cover the airlines’ flights into the Philippines. CEB current operates mostly domestic flights despite flying to 22 international destinations. That said, TIH is looking to secure more partnerships to extend its services to other airlines, including AirAsia India.

- No other foreseeable catalysts. Aside from its tie-up with CEB and its sister company Philippines AirAsia’s tie-up with Zest Air, we do not foresee other catalysts. TIH has carried out plans to rebrand and market its travel insurance products via Google and social media in an effort to boost their take-up rate. We remain neutral on this aspect. Meanwhile, it has identified target acquirees in Thailand, but the plans are still too preliminary at this juncture. Moreover, it prefers to focus first on completing the acquisition of a 70% stake in Indonesian insurer PT Batavia Mitratama Insurance (BMI).

- TIMB’s top-line growth flat as expected. Its subsidiary, Tune Insurance Malaysia (TIMB), saw net earned premiums (NEP) fall MYR5.5m to MYR30m in 1QFY13, accounting for 24% of our segmental forecast and in line with our estimates. It did not retain MYR4m in NEP due to the 25% motor quota sharing with Swiss Re. Nonetheless, TIMB’s net profit surged 182% y-o-y, bolstered by positive progress in its business realignment.

- Adjusting FV. We see the MICO tie-up as a major catalyst. We adjust our FY14 earnings forecast higher by 8.2% and lift its FV to MYR2.15. We also adjust our management expense ratio higher to 20% vs 18% previously as we think its expenses could continue to remain high.

CEB partnership

 A major catalyst. The five-year tie up with MICO for Cebu Pacific Air (CEB) marks its first major airline coverage after AirAsia (BUY, FV: MYR3.94). The agreement only covers international flights into Philippines from any of the 15 countries TIH has operations in. CEB currently has flights to 22 international destinations in total. TIH has operations in >10 of these destinations, including Bali, Bangkok, Guangzhou, Hanoi, Ho Chi Minh, Hong Kong, Jakarta, Kota Kinabalu, Kuala Lumpur, Macau, Osaka, Phuket, Shanghai, Singapore and Siem Reap. MICO is CEB’s exclusive partner and it will continue to underwrite insurance for CEB’s domestic flights.

Further tie-ups are possible. TIH is also in talks with other airlines. Although no specific airline was mentioned, Management is of the opinion that many airlines, especially those with multiple operations (eg + hotel operations) will see greater need for insurance partnerships. The agreements will largely be similar to its current agreement with AirAsia, ie it pays commission of about 30% of gross premiums or more to the airline partner if there are no existing regulations on commission expenses.

 Average premiums in line with other markets. Based on the CEB’s current travel insurance product calledTravelSure, provided by MICO, a passenger subscribing for the insurance will be charged PHP250.00 for a one-way trip and PHP325 for a round trip (with a maximum coverage period of 30 days). This worked out to be about MYR18 for one-way and MYR24 for return, almost consistent with TIH’s product pricing in the markets it operates in, except Australia. We understand that the plan rates for the international routes will be altered to be consistent with TIH’s plan rates, as the insurance plans will be underwritten based on the country of departure. However we believe the transition should not affect customer perception given the similarities in pricing already in place. TravelSure’s insurance benefits are also consistent with TIH’s existing travel products, covering accidents and medical services, recovery of lost travel documents, loss/delay/damage to checked-in baggage, strikes and hijacking, flight delay, trip curtailment and cancellation for medical or legal emergency.

 Details on CEB. CEB is a leading low-cost carrier (LCC) in the Philippines and boasts of having the youngest fleet (average of 3.87 years) and the most extensive route network in the country. It launched its Manila-Bali route in March 2013 and is scheduled to launch its direct Manila-Phuket route in Aug 2013. The carrier is looking to fly to more international routes. It has secured air traffic rights to fly to Saudi Arabia, Kuwait and Australia. Although TIH will not able to underwrite travel protection plans for departures from countries it has no operations in, we think CEB’s regional route expansion still bodes well for its business.

 Leveraging on the Philippines’ consumer growth. We are positive on this partnership as we believe CEB and TIH are well positioned to gain from the growth potential of the Filipino consumer spending. Although CEB controls nearly half of the domestic market, TIH will not gain from this strength, as its agreement with MICO is only for flights into the country. Meanwhile, the airline’s international passenger numbers are still relatively small, at slightly above 20% of its overall passengers, but growth had been strong and we continue to see promising numbers from this segment. In 1QFY13, CEB’s international passenger growth rates were strong in Brunei (43%), South Korea (34%), Malaysia (18%), China (15%) and Indonesia (13%), due to increased flight frequencies and promotion packages.  We also believe that CEB may have benefited from the sizeable Overseas Filipino Workers (OFWs) market, especially those working in Asean and hence need to travel frequently. We noted that CEB frequently launches campaigns to lure OFWs to fly with it to and fro popular destinations such as Hong Kong.

Diversifying income streams

 Online biz getting more regional. To date, about 54% of TIH’s online business is sourced from foreign markets. Viewing it from a geographical perspective, the online premium portfolio is now more diversified (FY12: 47% of premium portfolio). This is consistent with AirAsia’s regional expansion, on which TIH is able to leverage to introduce its travel products into new markets.

TIMB’s premiums portfolio now more balanced. TIMB had realigned its focus to improve bottomline profitability, starting by encouraging its agents to enhance sales of its non-motor business. Therefore, while its agent base has not deviate much in size – from 1,023 in 2012 to the current 1,078 – its 1QFY13 results demonstrated significant progress, thanks to its business realignment. TIMB’s motor portfolio had shrunk from 48.2% to 27% within the quarter, faster than our expectations. The current general insurance (GI) portfolio mix looks well-balanced, leaving TIMB plenty of room to expand its motor portfolio again in the future if needed. We believe this had also helped improve TIMB’s capital adequacy ratio (CAR) to 240%.

 Claims continued improving. Claims ratio continued to improve to 41.8% (vs 45.9% in FY12 proforma). By segment, the online claims ratio was slightly higher at 3.9%, while TIMB’s claims ratio was at 68.9%. This was due to improved claims management, a more balanced GI premium mix with more low-claim products, and the 25% motor quota sharing agreement with Swiss Re. This was despite recognition of MYR1.95m for Malaysian Motor and Insurance Pool (MMIP) losses. If TIMB continues to improve its claims ratios, and if the online business grows more in proportion to TIH’s total business, we expect claims ratio to improve significantly.

 More MMIP provision expected. Management guided that the MMIP provision of MYR1.9m is short of its FY13 provision of MYR2.4m (FY12: MYR7.8m). Therefore we expect another MYR0.5m of MMIP provision to be recognized in 2QFY13. However, Management shared that the company will be entitled to a double tax relief that may amount to >MYR2m.

 Management expenses remained high.1Q13Groupmanagement expense (ME) ratio was high at 22.2%, with online ME ratio at 16.2%, a surge from 10.9% in FY12. TIH incurred MYR1.4m in ME due to additional personnel and marketing expenses. It also incurred some expenses for the due diligence of its proposed acquisition of Indonesia’s BMI and for RAM Rating’s assessment. TIMB’s ME ratio also spiked to 21.9% from 19.4% in FY12 due to a few personnel changes in the Management team and the reduction in NEP. While we expect the NEP to pick up pace, partly due to the strong growth potential of its low-claims online business, we are increasing our ME ratio assumption from 18% to 20% for FY13 and FY14 as expenses may likely remain high. Hence, we think the ME ratio should normalize to our new assumption.

Source: RHB