The  share  price  correction  yesterday  was  likely  due  to  temporary setbacks in 3Q results and a cancellation of agreement with Al Hai LLC, which management  said  to be non-material as  it is still on the lookout for  MENA  and  Indonesia  partnerships.  Maintain  BUY  and  its  MYR3.00 TP (24x FY15F P/E, 45% upside).  We envision long-term value from its associates, potential partnerships and a recovery in travel demand. 
 
Key takeaways from the group’s 3Q14 briefing are: i) The Middle East North Africa (MENA) JV platform is in place to support rapid expansion; ii) The Thai associate to experience a strong growth from 2015 with the expansion  of  the  Osotspa  business,  AirAsia  (AIRA  MK,  BUY,  TP: MYR2.73)  and  new  ventures;  iii)  Its  Indonesia  acquisition  is  still  in  the plans, iv) it plans to  realign focus to develop capabilities in business-to-consumer (B2C) and business-to-business (B2B).  

Travel  insurance  and  associates  update.  For  the  travel  insurance segment,  we  understand that  the  QoQ  decline  in  travel policies  earned were  due  to  a  combination  of  poorer  international  tourist  flows  in Thailand/ Indonesia and issues with AirAsia’s booking process. This had effected in a 1-2% dip in take-up rate (or 200,000 policies in our view), and  had  caused  a  slight  mis-correlation  to  the  15%  YTD  passenger growth. AirAsia has committed itself to improve the booking process and we believe this to have a positive impact on its take-up rate from FY15. For the  MENA region, we believe the cancellation of a memorandum of 
understanding with Al Hai LLC is not a setback as management is still on a lookout for partnerships in both MENA and Indonesia. We expect the Thai associate to perform better in terms of earnings vs 3Q14’s MYR2m due to increments from travel insurance and new business locally.  

Low 3Q14 underwriting (UW) margin at 18% not likely to recur. The group’s UW margins, at a quarterly low vs the average of 20%, were due to  lumpy  claims  on  Tune  Insurance  Malaysia  Berhad  (TIMB)’s  level. TIMB  had  exposure  to  two  lumpy  fire  claims  of  MYR8m-10m  each (TIMB’s portion of  claims  provisioning  is  MYR1m  each).  The  medical claims  unit,  which  is  a  new  business  segment  in  2014,  is  still  a  new business strain where the net claims ratio is high, albeit trending down. The  group  is  looking  to  diversify  the  medical  risk  via  quota-sharing agreements. We retain our earnings forecasts for now.

Maintain  BUY,  TP  of  MYR3.00  at  an  unchanged  24x  FY15F  P/E  –  a premium to sector valuations of 14-20x, implying a 16% 3-year forward earnings  CAGR  vs  the  sector’s 13%. Tune  Ins  is  a  growth  stock  with valuations  supported  by  swift  global  expansion,  coupled  with partnerships  with  airlines,  travel  providers  and  e-commerce  players. Diversification away from AirAsia is pivotal to support our call. 

Takeaways From 9MFY14 Analyst Briefing

Business updates for the quarter. The following are other takeaways:-  

Thai  associate  -  During  that  quarter, most  of  the  profits  were  from the  existing Osotspa  group  of  companies,  with  just  a  one-month  contribution  of  the reinsurance sharing of AirAsia Thai travel insurance business.  o  We  expect  the  Thai  associate  unit  to  generate  healthy  profits,  higher  than 3Q14’s MYR2m (MYR4m in total before equity accounting of the stake). We expect 4Q to see full contributions of its travel insurance business and new business streams from the local businesses.  

Online  travel  insurance  –  Thailand  and  Indonesia  charted  lower-than-expected performance  in  terms  of  its  topline.  This  was  due  to  weaker  recovery  in international travel segment, as well as airline capacity adjustments and foreign currency fluctuations in Indonesia.  o  The group reiterated its outlook on strong 4Q travel demand, consistent with our view. We understand that should travel bookings growth pick up in any month, a portion of that can be immediately recognised as earned policies.  

Take-up rate – This measure, defined as earned policies over total passengers, suffered  from  a  negative  impact  of  1-2%  from the group’s average of 26-32%. This  arises  from  a  variety  of  factors,  namely  poor  performance  in  the international  passengers  from  the  regional  units,  and  short-term  issues  with AirAsia’s online booking process.  Fortunately,  AirAsia  has  agreed  to  improvise the  online  booking  engine,  which should see  full  impact  on the  results  of  Tune Ins take-up rate by FY15.  o  We  estimate  this  dip  would  translate  into  approximately  200,000  policies. Excluding  this  short-term  blip,  QoQ  policies  earned  may  have  seen  an increase.  The  reported  quarterly  policies  earned  were  1.81m  in  3Q14  vs 2.04m in 3Q13.  

TIMB’s  premium  grew  across  all  segments.  However  the  margins  were hampered by high combined ratio during the quarter. TIMB had lumpy exposure to fire  claims,  with case  sizes  of  MYR8m-10m  each.  For  TIMB’s  portion,  it  had provided for MYR1m of net claims provisioning for each case. Also, higher-than-budgeted medical claims had also impacted its claims ratio, given that some of 
the medical business had commenced this year and had formed new business strains.  TIMB’s  YTD  claims  ratio  is  67%  with  Malaysia  Motor  Insurance  Pool (MMIP), or 61% without. 3Q14 claims ratio was 79% (inclusive of MMIP).   

TIMB’s capital adequacy ratio was at 252%. This is consistent with its guidance of  maintaining  an  internal  capital  target  level  (i.e.  capital  adequacy  ratio)  of >200%.  

The  stock’s  foreign  shareholding  remained  largely  unchanged  at  41-42% throughout both Sept-Oct period, despite the  selldown on global stock markets. Tune Ins remains one of the most liquid and high foreign ownership amongst the insurance stocks in our coverage.  
 
Catalysts.  Tie-ups with global partners are fundamental to expand Tune Ins’ reach from  an  ASEAN  insurer  to  a  global  insurer.  Its  joint  venture  with  Cozmo  Travel directly allows it to tap into customers from the Middle East, Africa and Europe. Better topline performance from TIMB could provide upside to our forecasts.  Risks. A surge in online claims ratio, competition as well as weak marketing may hurt its  take-up  rate.  A  prolonged  tourism  slump  in  Thailand  could  hurt  travel  demand. Other risks may include an uptick in expenses as Tune Ins realigns its B2C focus and sharpens  its  multi-platform  capabilities.  Any  strategic  stake  selldown  by  the  main shareholders presents opportunities to accumulate. 

Financial Exhibits

We believe Tune Ins' topline growth will continue to be driven by the strong latent potential of online premiums. For its non-online subsidiary, Tune Insurance Malaysia, boosting bottomline profits remains as the focus

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

Financial Exhibits

In FY12, Tune Ins' repayment of MYR133m in borrowings (for business expansion via Tune Insurance Malaysia) had resulted 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 

Company Profile

Tune Insurance Holdings, 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  personal  accident insurance for Tune Hotels’ guests.

Recommendation Chart

Source: RHB