AMINVESTMENT Bank Research and Affin Hwang Capital have maintained their hold calls on LPI Capital Bhd as its FY19 results were flat and the outlook for the general insurance industry is uninspiring.
LPI Capital’s net profit for FY19 came in at RM322 mil which represented a 2.6% increase from the previous year.
AmInvest said the company’s shareholder equity was lower in FY19 due to a drop in the fair value of its reserves. It said this was contributed by marked-to-market losses of RM232.9 mil and it believes this was primarily due to its holding of Public Bank shares whose value had eroded.
The marginal increase in net profit was underpinned by stronger net earned premium (NEP) although partially offset by higher net claims, commission and management expenses.
The FY19 earnings were in line with AmInvest’s expectation, making up 99.6% of its estimate and accounting for 99.7% of consensus projection.
Its FY19 gross written premium (GWP) grew modestly by 3.7% yoy, contributed largely by motor and marine, aviation and transit premiums. Meanwhile, growth in GWP of fire insurance was tepid at 1.3% yoy.
Nevertheless, its NEP rose by 8.7% yoy as the group ceded a lower portion of the fire and motor premiums to reinsurers. This has resulted in its retention ratio climbing to 67.6% in FY19 versus 65.8% in FY18.
AmInvest said the liberalisation of fire and motor insurance had resulted in a competitive pricing for premiums for the general insurance industry. The group was not spared from this and its underwriting margins slipped to 29.6% in FY19 vs 32.1% in FY18.
Claims ratio rose to 43.9% in FY19 from 40.9% in FY18. This was attributed to the rise in claims from the marine, aviation & transit and miscellaneous segments, particularly the health and medical class of insurance. Meanwhile, claims ratio for motor insurance remained elevated at 72.4% in FY19 vs 73.4% in FY18.
Management expense ratio was stable at 19.1%. Commission ratio rose slightly to 6.8% in FY19, largely due to higher commission expenses. The company’s combined ratio for FY19 increased slightly to 69.8% (FY18: 67.3%) and was marginally lower than AmInvest’s estimate of 71.5%.
Affin Hwang Capital said the industry had been challenging for LPI due to price competition while weak demand capped its gross written premium growth at 4% yoy in 2019. It had tweaked its 2020E-21E net profit by 4-7% as it projects slower investment income growth. It has maintained its hold call for the counter with a revised TP of RM15.70.
“The outlook for the general insurance industry remains challenging due to the lukewarm growth in gross premiums,” said AmInvest. This was in tandem with the weaker purchase of properties and new vehicles through bank loans whose growth continued to be soft.
It added that the impending review by the authorities this year could see fire insurance premiums being further liberalised and it sees pricing pressure in the near term with additional coverage/benefits needed to be offered to compete with other general insurers.
The company declared a second interim dividend of 43 sen per share, bringing the total dividends to 70 sen (payout: 86.5%) for FY19 (FY18: 68 sen/share) which were in line with its estimate.
AmInvest has maintained its ‘hold’ recommendation for LPI Capital with a fair value of RM15.30. At 2.45pm today, LPI traded at RM15.26, up 46 sen from yesterday’s close with 21,800 shares changing hands. – Feb 4, 2020
