We  expect  TIH  to  report  solid  3Q13  results  as  new  travel  insurance contributions  from  the  Philippines  mitigate  seasonally  weaker  tourist demand. Maintain BUY, with our FV unchanged at MYR2.40 (22x FY14F EPS).  The  30%  upside  from  its  last  price  is  justified  by  catalysts  that include: i) margin expansion, ii) market expansion, iii) M&A/tie-ups, and iv) a turnaround story.

- Expectations in line for seasonally weaker quarter. We expect 3Q13 online  and  reinsurance  premiums  of  MYR20m-25m  (2Q13:  MYR23m), assuming  a  26-32%  take-up  rate.  AirAsia  (AIRA  MK,  BUY,  FV: MYR3.94)  Group  charted  27%  y-o-y  passenger growth  in 3Q13,  with:  i) AirAsia Indonesia (36%), ii) AirAsia Thailand (27%), iii) AirAsia Malaysia (11%),  and  iv)  AirAsia  Zest  (525%).  AirAsia  X  (AAX  MK,  BUY,  FV: MYR1.65)  saw  33%  growth  over  the  same  period.  These  figures  are commendable as the Muslim fasting season was in 3Q13 this year.

- New  Philippine  contribution  to  mitigate  seasonal  weakness.  TIH’s travel  insurance  for  passengers  of  AirAsia  Zest  and  the  international flights  of  indirect  Philippines  airline  partner  Cebu  Pacific  commenced  in June. We believe the additional online policy base could correlate to data from  the  Philippines,  which  contributed  13%  of  3Q13’s total  customer base.  Our  forecast  of  TIH’s online premiums  are  based  on  passenger growth,  with  the  collective  9M13  customer  base  (see  Figure  1) contributing >70% of our FY13F assumptions.

- More  conservative  passenger  forecasts.  We  lower  our  FY13F passenger  growth  to  21%  (from  28%),  premised  on  flight  cancellation risks  towards  4Q13  as  typhoon  Haiyan  (Yolanda  in  the  Philippines) affected  October  and  November  flights  in  the  archipelago.  The  same super storm hit the shores of Taiwan and China this month, resulting in a 5%  reduction  in  our  FY13F-14F  travel  premium  forecast,  although  its claims  ratio  should  remain  intact,  as  natural  disasters  are  not  insured events.

- Maintain  BUY.  Despite  our  conservative  adjustments  to  travel insurance,  our  earnings  forecasts  (FY13F/14F  core  EPS  growth  of 32%/29%)  are  unchanged.  We  assume  higher  tax  relief  from  Malaysia Motor Insurance Pool provisioning and higher premium growth for TIH’s general insurance subsidiary Tune Insurance Malaysia (TIMB).  Maintain BUY call and MYR2.40 FV, pegged to 22x FY14F EPS. We have yet to include AirAsia India’s potential contributions to its travel insurance.

- Assuming the same blended take-up rate, we expect to see 1.9-2m online insurance policies being written in 3Q13

Maintaining 26-32% take-up rate. TIH’s online insurance business is present in 16 of the 20 markets that AirAsia currently operates in, with the inclusion of Taiwan and Myanmar since 1Q13. According to AirAsia’s FY11 annual report, the airline carried about 29.8m passengers, of whom 21.7m were from markets where TIH offers travel insurance. Of the latter figure, 26.49% were covered by the group’s Travel Protection Plan.  This  percentage  also  represented  the  take-up  rate  for  that  financial  year. Assuming that about 70% of the total passengers carried by AirAsia are from markets that  TIH  has  operations  in,  and  applying  the  same  26%  take-up  rate,  we  expect  to see  the  group  issuing  1.9-2m  policies  in  3Q13.  Note  that  the  travel  insurance contribution from Cebu Pacific only applies to the carrier’s international flights that are flying into the Philippines.

Higher free float of 41% (from 28%). This was partially due to a stake sale by major shareholders, arising from Tune Money’s distribution of dividend in specie in October. We view any further paring down of stakes to be minor, since Tune Money only has a 3.9% remaining stake in TIH. Overall, we view the higher free float positively, as the stock charted its highest trading volume, relative to the other insurers that we cover. Moreover,  the  correction  in  the  share  price,  possibly  due  to  some  paring  down  of stakes  by  the  company’s major  shareholders,  offers  a  cheaper  entry  opportunity,  in our view. 

- One of TIH’s major risks is whether it can maintain its ~4% claims ratio for the online travel insurance business 

Claims  experience  -  an  investment  highlight  as  well  as  risk.  TIH  has  been sustaining  its  track  record  having  of  a  superior  online  claims  ratio  of  3-4%  (vs  the industry’s 29% in 2012) for personal accident coverage.  We believe one reason could be AirAsia’s high operating efficiency, minimal accident track  record  and  consistent  on-flight  punctuality.  Due  to  this  reason,  TIH  has  been able  to  offer  competitive  products  such  as  a  one-/two-hour  flight  delay  protection  in markets  like  Indonesia.  By  comparison,  the  industry  norm  for  travel  insurance packages provides protection for flight delays of six hours or more. While the group is committed to expanding its business and striking up more partnerships,  we see new claims  experience  as  a  wild  card,  as  operating  efficiencies  of  partner  entities  may differ from that of AirAsia.  One solution to mitigate such a risk is to adjust the premium pricing accordingly. We note that the pricing for TIH’s Cebu Pacific international customers is at a premium to the average pricing for TIH’s other markets, believed to be reflective of its risk profile.

Financial Exhibits

- We believe TIH's topline growth will continue to be driven by the strong latent potential of online premiums. We believe that its TIMB subsidiary's revenue growth is not likely to pick up yet, as management is more focused on boosting its bottomline

- We expect TIH’s claims ratio to be better than the industry’s, as we project an increase in the proportion of low claims online travel insurance premiums vs total premiums. Historically, its online claims ratio stands at 3.6%

Financial Exhibits

- TIH's repayment of MYR133m in borrowings (for the business expansion via TIMB) is expected to result in zero gearing

SWOT Analysis

Re-rating catalysts:

- Higher than expected take-up rate in the online business 
- Better than expected improvement in general insurance (GI) claims ratio
- Higher than expected growth in GI premiums, with controlled levels of expenses and claims
-  Potential acquisition opportunities  
- New customer segment  
- TIMB posting better than expected profitability
- Higher dividend payouts 

Company Profile

Tune  Insurance  Holdings  (TIH),  an  investment  holding  company,  is  engaged  in  the  provision  of  various  general  and  life  insurance products  in  the  Asia-Pacific  region.  The  company  offers  a  range  of  online  products,  including  travel,  lifestyle  protection,  and  guest personal accident insurance.

Recommendation Chart

Source: RHB