Investment Merits

• Poised to benefit from the reopening of travel, with multiple regional  airline partners and a higher take-up rate compared to pre-pandemic

• Partnership business model to support long-term growth in regionalmarkets without the need for heavy capex
•  Rebound in investment income to supplement topline performance

Company Profile

Tune Protect Group (TPG) is an insurtech company that specialises in  non-life insurance underwriting with a focus on three key pillars – health, lifestyle, and SME. It was recently granted approval by Bank  Negara Malaysia to market digital life insurance via the financial  technology regulatory sandbox. The group services customers in  ASEAN and the Middle East via its 73 digital partners – including 29  local underwriters in over 49 markets across the globe. TPG is also the  sole insurance industry representative in the FTSE4Good Bursa  Malaysia Index.

Highlights

Tailwinds from the return of travel. The widespread recovery of  global travel bodes well for TPG and its travel partners in Malaysia,  Thailand, and the Middle East. Most of the group’s Malaysia travel  exposure is via its related company AirAsia, which reported robust  passenger traffic in 1Q23 (tripled YoY, +13% QoQ). Feedback from  management suggests that the take-up rate for TPG’s travel insurance  policies from AirAsia passengers is now at c.12% – up from a single-digit average before the pandemic. For its regional exposure, the group  has secured multiple airline partnerships (eg Bamboo Air, Salam Air)  over the past few years. We believe the return of travel contributions  domestically and regionally should help the group achieve its target of  double-digit YoY growth in net written premiums (NWP) for FY23.

Gaining regional traction via partnership model. Outside of airline  partners, TPG has also secured multiple partnerships with renowned  fintech/insurtech names in the region. One of these is VNPay, a digital  payment giant in Vietnam with 15m active users and more than 150,000  corporate clients – the group will launch travel-related products through  this partnership soon. TPG is also partnering Bolttech and PolicyStreet,  two insurtech companies, to offer bite-sized insurance products to  individuals and small businesses. In our view, TPG’s partnership model  allows for rapid growth in regional markets without the need for heavy  capex, and is positive for the long-term growth of the group.

Investment income to rebound. The group is optimistic of strong net  investment income in FY23, following a breakeven year in FY22. While  being heavily exposed to debt securities and fixed income funds in  FY22, – leading to large mark-to-market losses from interest rate  movements – its FY23 strategy is to leverage on money market funds which should provide better returns in a high interest rate environment. Guidance from management suggests that its investment portfolio has performed well YTD, and could be a wildcard to supplement strong topline performance in FY23.

Company Report Card

FY22 results highlight. TPG achieved its highest-ever receipt of NWP  worth MYR347m (+72.5% YoY) in FY22, despite subdued contributions  from travel insurance during the year. The combined ratio, however,  added 8ppts to 108% due to higher commissions (in line with the  scaling of business) and greater claims experience (an industry-wide  phenomenon). Overall, FY22 net loss of MYR34m was also attributable  to a share of losses from Tune Protect Thailand owing to large volumes  of COVID-19 related claims, and unfavourable bond yield movements  resulting in investment losses in 1H22. Moving forward, management is  committed to maintaining the combined ratio below 100% – driven  largely by topline growth and helped by more efficient ratio  management. The group is also committed to retaining more than 70%  of business while slowly paring down on its exposure to commercial  insurance, where the risk-reward is relatively unbalanced for smallersized insurers like TPG.

ROE. Due to the loss-making year, FY22 ROE was -6.3% (FY21: - 2.7%). Prior to the pandemic, the group consistently maintained doubledigit ROEs annually. Management is confident of a return to the black  this year, and we expect TPG to obtain mid-single digit ROE in FY23.

Dividends. TPG has not paid dividends since FY19 but distributed  more than 40% of earnings prior to that. No DPS/payout guidance has  been provided for FY23, with all decisions down to the board’s  discretion.

Management. Rohit Nambiar joined TPG in Oct 2020 and is the current  group CEO. He has accumulated over 20 years’ experience in the  insurance industry, and is supported by How Kim Lian and Prasanta  Roy, the group chief financial and technology officers.

Investment Case

We are encouraged by TPG’s short-term prospects, given the  widespread return of travel and the rebound in investment income,  which should anchor its return to the black this year. Further out, the  group’s highly successful partnership model should allow it to penetrate  regional markets relatively quicker without the need for heavy capex  spending. On top of that, a successful return to profitability in FY23  could see the group pay out dividends again for the first time since  FY19.

We ascribe a FV of MYR0.53-0.56 to the counter, obtained from a  GGM-derived fair P/BV of 0.75x. Our GGM inputs include cost of equity  of 10%, long-term growth of 3.5%, and sustainable ROE of 8.25%  (against the pre-pandemic double-digit averages).

Key risks include potential new COVID-19 variants leading to closure  of borders, execution risk from the partnership model, and widening  investment losses.

Source: RHB Securities Research - 16 May 2023