AFFIN Hwang Capital has maintained its sell recommendation on investment holding company LPI Capital and target price at RM9.50 due to cautious business and consumer expectations amidst the Covid-19 pandemic.
While downside risks may be mitigated by LPI Capital’s strong balance sheet, with a capital adequacy ratio (CAR) in excess of 400%, the general insurance industry is facing unprecedented challenges brought on by the Covid-19 pandemic and the ongoing movement control order (MCO), according to Affin Hwang Capital, and it expects 2020 to remain a bleak year.
Affin Hwang Capital analyst Tan Ei Leen says, “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 for at least for another year, adding on to the existing industry challenges such as price competition, new technological trends and higher claims cost.”
Social distancing will be a new practice or ‘new normal’ in society and likely to change business and consumer expectations.
With the prospect of rising unemployment becoming more certain as more employers are planning to downsize their workforce, the insurance industry may suffer even more as businesses cut back allocation for insurance coverage, while the reduced purchasing power of individuals impacts on the growth in motor class insurance.
In the domestic market, the general insurance industry saw a marginal 0.8% year-on-year (yoy) decline in gross written premium (GWP) in 2019. Nonetheless, Affin Hwang Capital expects a more drastic decline in industry GWP in 2020 (expectation is between -5% and -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% and 3.9% yoy respectively.
According to Affin Hwang Capital, LPI Capital may see a decline of 7% yoy in its overall 2020 GWP. In a recent conference call with management, it was gathered that a sharper contraction is expected in the construction and engineering segments due to project delays 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.
Affin Hwang Capital believes that the Covid-19 pandemic will result in greater awareness of medical and hospitalisation coverage and for business losses caused by interruptions due to infectious disease at the workplace.
Meanwhile, lower motor and medical claims, while being a boon for insurers during MCO, may start creeping up once the MCO is lifted.
“Covid-19 and the extension of the MCO has a positive impact on the insurers’ claims ratio (2019 claims ratio stood at 58.1%) as there are fewer road accidents and fatalities. The motor class, which has had claims hovering around 70% in the last three years, has been the main dampener to most general insurers’ underwriting profit,” says Tan.
In fact, according to PIAM (Malaysian Association of General Insurers), the industry’s motor underwriting profit suffered an underwriting loss of RM355 mil in 2019 and had made a total payout of RM5.5 bil in net claims.
Nonetheless, should the MCO be lifted and business activity gradually resume, the motor claims ratio is expected to creep up.
Meanwhile, insurers – which have been suffering from high medical claims over the years due to medical inflation (annual inflation of 13% a year) and a lack of price transparency in medical billings – will see a reprieve during the MCO period as hospitalisation rates have declined.
Overall, as lower motor and medical claims have had a boon for insurers during MCO, it expects the overall impact on insurers’ combined ratio to be unchanged on a yoy basis.
Affin Hwang Capital maintained its sell rating on LPI Capital, with a 12-month target price of RM9.50, based on a 1.93x price-to-book ratio (P/BV) target on its 2020 book value of equity per share (BVPS) of RM4.92.
It maintained its 2020-22 earnings for LPI Capital, based on two assumptions: i) GWP growth at -7.0% for 2020E and flat for 2021E; and ii) net claims ratio at 43%.
Affin Hwang Capital foresees LPI Capital’s 2020 net profit declining by 14.5% year-on-year and to stay flat in 2021. Upside risks include recovery in the economy and more transparency in medical fees. – April 27, 2020
