Investment Highlights

• We maintain HOLD on LPI Capital (LPI) with an unchanged fair value of RM12.70/share. Our fair value is pegged to FY23F P/BV of 2.2x, supported by a ROE of 13.7%.

• We fine-tuned FY23F/24F/25F earnings by +1.2%/- 1.6%/+8% after tweaking our estimates for other operating income and expenses. No changes to our neutral 3-star ESG rating. We have also refined our methodology for computing the components of combined ratio to be closer to that of the group.

• Phase 2B of detariffication will be implemented from 1 July 2023. This will result in greater pricing flexibility for fire and motor insurance. Pricing flexibility for motor excluding the 3rd party products will be raised from +/- 15% in Phase 2 to +/- 20% in Phase 2B. Meanwhile, the pricing for both tariff and non-tariff fire products effective from 1 July 2023 will be adjusted to a band of up to -30% from the revised fire tariff 2.0.

• We gather pricing pressure still persists for the fire class of business albeit lower in 2023 than 2022. Competition on fire insurance pricing commenced last year.

• Despite the liberation and increase in pricing flexibility, we do not expect pricing pressures on motor insurance premiums. This is in view of the already thin margins for the motor class of business. We understand that the earlier phases of pricing flexibility have already been priced in by the market.

• The group plans to introduce more innovative fire and motor products to differentiate from the offerings of competitors.

• Meanwhile, for fire insurance policies with flood claims, the group has started to price up premiums to reflect recent claims experience.

• Recall in 1QFY23, the group recorded a gross written premium (GWP) of RM489.4mil (+2.7% YoY). Contribution from digital channels to the group’s GWP remains insignificant.

• By distribution channels, agency/bancassurance/brokers contributed 40%/22-23%/15% to group GWP with the balance from direct channel or corporates.

• 2QFY23 could see an improvement in the group’s net claims ratio from 51.8% in 1Q23 supported by the normalisation of claims from fire, marine, aviation, and transit class of businesses. 1QFY23 saw a reversal in overprovisioning for fire claims. In FY23, we anticipate an improvement in the net claims ratio for motors. Nevertheless, the ratio is still expected to remain high due to recent court awards of higher damages for 3rd party body injuries as well as potential increases in prices for parts replacements.

• With the US interest rate nearing the end of the hike cycle, we expect the 10-year MGS yield to be stable within 3.7%-3.8% for the remainder of 2023. This will be supportive of steady investment income in 2H23.

• Outlook remains challenging with the continued phased liberalisation of the pricing of fire and motor insurance products ahead. Pricing on fire insurance, the key segment for LPI, is still persistent, and this is likely to continue to impact the group’s underwriting margins.

• The stock is currently trading at a fair P/BV of 2.1x with a decent dividend yield of 5.8% for FY23F.

Source: AmInvest Research - 30 Jun 2023