Affin Hwang Capital Research Highlights

Author: kltrader   |   Latest post: Fri, 17 Jan 2020, 8:43 AM


LPI Capital - Preserving Margins Amidst a Challenging Market

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Preserving Margins Amidst a Challenging Market

In our view, LPI Capital will continue to face industry headwinds, i.e. stiff competition, higher risk claims and moderating industry growth. We anticipate potentially lacklustre gross written premium (GWP) growth (in motor and fire classes) as well as higher claims ratio due to higher hospitalization claims, persistent motor claims and risk of large event marine, aviation & transit (MAT) losses in 2020E. On a more positive note, LPI continues to adopt a prudent underwriting policy and stays away from price-discounting. Thus far, it is still No. 1 in the domestic fire insurance market. In our view, the concerted effort by authorities to contain medical costs could be a re-rating catalyst for the general insurance players. Reiterate HOLD, PT unchanged at RM15.90.

Industry GWP Growth Expected to Remain Lacklustre in 2019E-21E

In the domestic market, the general insurance industry saw a 1.4% yoy decline in GWP for 1H19. For 1H19, the motor insurance industry has seen flat growth yoy (1H19) while fire insurance grew by 2.5% yoy. Although LPI has continuously outperformed industry growth, expectations of flat car sales growth in 2020 and more competition in the fire insurance market could potentially increase downside risks to our 2020E GWP assumption of 4% yoy.

Claims ratio creeping up, led by the medical & health insurance class

According to BNM, the industry trends are showing that general insurance claims ratio are creeping up, from 57.5% (2017) and 58% (2018) to 59.6% as at June19. These were attributable to the medical & health insurance class (due to medical inflation, estimated at mid-teens growth in 2019), persistently high motor claims (due to rising accident cases) and more large-scale MAT claims. Inevitably, LPI was hit the same as well in its miscellaneous class.

Potential Catalysts – Lowering Medical Cost Inflation, Among Others

We note that the general insurance industry players have set-up a task force to identify the cost drivers in medical inflation. Recommendations to the authorities and a concerted effort to bring medical cost lower will be a catalyst for the general insurance players’ profits, in our view.

Reiterate HOLD, at An Unchanged Price Target of RM15.90

We reiterate our HOLD rating on LPI, with a Price Target of RM15.90 based on a 3.09x P/BV target on 2020E’s BVPS of RM5.15. We maintain our FY19E- 21E earnings forecasts for LPI, based on these assumptions: i) GWP growth at ~4.0%; ii) net earned premium growth at 8-9%; iii) net claims ratio at 44- 45%. Downside/upside risks: Rising/declining medical cost inflation.

Source: Affin Hwang Research - 21 Oct 2019

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