In our view, the general insurance industry is facing unprecedented challenges brought on by the COVID-19 pandemic and we expect 2020 to remain a bleak year. Depending on the extent of the MCO and restrictions which will be gradually lifted, we are of the view that business and consumer expectations may remain cautious at least for another year, hence adding on to the existing industry challenges such as price competition, new technological trends and higher claims cost. While downside risks may be mitigated by LPI’s strong balance sheet, with a CAR in excess of 400%, we maintain our SELL and TP at RM9.50.

Industry ‘gross written premium’ may see a more drastic decline in 2020

In the domestic market, the general insurance industry saw a marginal 0.8% yoy decline in ‘gross written premium’ (GWP) in 2019. Nonetheless, we expect a more drastic decline in industry GWP in 2020 (our expectation is between - 5% to -10%), exacerbated by weak economic activities while consumer sentiment may stay weak; the crisis years 1998 and 2009 saw the industry GWP decline by 10.7% yoy and 3.9% yoy respectively.

Changes in Operating Conditions to Drive Revenue Contraction at LPI

In our view, LPI may potentially see a decline of 7% yoy in its overall 2020 GWP. Through a recent con-call with management, we gathered that a sharper contraction is expected in the construction and engineering segment (due to projects delay and deferred property launches), while the motor and fire insurance class may see a marginal decline yoy, supported by recurring business from Public Bank, its agency network and on-line platform.

Disruptive Changes Brought on by COVID-19 Pandemic

We believe that the COVID-19 pandemic will result in more awareness for medical and hospitalization coverage and for business losses caused by interruptions due to infectious disease at the workplace. Meanwhile, lower motor and medical claims, which have become a boon for insurers during this MCO period, may start creeping up once the MCO is lifted up.

Maintain SELL Rating; Target Price Unchanged at RM9.50

We maintain our SELL rating on LPI, with a 12-month TP of RM9.50 based on a 1.93x P/BV target on our 2020E BVPS of RM4.92. We maintain our 2020- 22E earnings for LPI, based on these assumptions: i) GWP growth at -7.0% for 2020E and flat for 2021E; and ii) net claims ratio at 43%. We foresee 2020E net profit to decline by 14.5% yoy and stay flat in 2021E. Upside risks: recovery in economy, more transparency in medical fees.

Source: Affin Hwang Research - 27 Apr 2020