Investment Highlights

• We maintain HOLD on LPI Capital (LPI) with a higher fair value of RM14.40/share (previously: RM14.20/share) after rolling over our valuation to FY23. Our revised fair value is based on FY23 P/BV of 2.3x, supported by ROE of 15.3%. No changes to our earnings estimates and 3- star ESG rating.

• Recall as at end 4Q21, the group received more than 1,300 flood claims intimations. We gather that the number of cases has risen to 4,125 in mid Mar 2022. This comprised of flood claims on residential properties, commercial and industrial risk of 3,200, 721 and >50 cases respectively. These flood claims are largely from the group’s fire insurance policies. As for flood claims from motor policies, there were only 20 cases.

• Management alluded to a gross claims reserving of RM321mil. However, with reinsurance treaty, LPI’s net exposure to flood claims will be limited to RM3mil. This amount (RM3mil) has already been fully set aside as provisions for potential flood claims in 4Q21.

• Also, flood claims will increase the reinsurance cost by RM10mil. RM4mil of the higher cost has already been reflected in FY21. Another RM6mil will be recognised this year impacting the group’s net earned premiums (NEP) in FY22.

• In total, the impact from flood claims was RM13mil (RM3mil in provisions for claims and RM10mil for higher reinsurance cost).

• Approximately 80.0% of the group’s motor insurance (in terms of number of policies) were comprehensive policies. Out of this, less than 20.0% were covered for floods. With the recent flood incidents particularly the major one in December 2021, we understand that there has been a surge in motor policy holders opting to cover for floods. This led to an increase in the comprehensive motor policies with flood coverage to circa 30.0%.

• 4Q21 saw a QoQ increase in claims ratios for all major classes of insurance. Motor and medical claims have normalized after the easing of lockdowns and reopening of the economy. Moving forward, claims ratio for fire insurance is also likely to trend higher. For FY22, we have penciled in higher claims ratio of 42.2% vs. 36.5% in FY21 leading to an increase in combined ratio of 68.4%.

• Contribution of premiums from digital channels is still minimal. Most of their premiums (40.0%) are contributed by the agency channel followed by bancassurance.

• MFRS 17 will be implemented on 1st Jan 2023 and the impact on LPI will be minimal. This is due to the shorter maturity of their insurance policies.

• We understand that the implementation of Phase 2 detariffication of motor and fire insurance has been delayed to 1st July 2022 from end of 2021. Compression in pricing/rates for fire insurance has already been seen in the market and is likely to persist moving forward. We see stiffer competition in pricing for fire than motor insurance as the latter’s margins are already thin.

• We have factored in a NEP growth of 3.6% for FY22 on the back of economic recovery supported by the reopening of the international border. The group hopes to secure the insurance coverage for construction risk for infrastructure projects such as MRT 3.

• Increase in MGS yields from expectations of interest rate hikes is anticipated to result in further fair value losses on the group’s fixed income unit trust investments. Nevertheless, to mitigate this risk, the group plans to shorten the maturity of their investments.

Source: AmInvest Research - 18 Mar 2022