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Tuesday, February 19, 2019

LPI Capital - Pressure on fire insurance underwriting margins ahead

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Investment Highlights

  • We maintain our HOLD call on LPI Capital (LPI) amid a lack of earnings catalysts while valuation remain uncompelling. Our fair value is unchanged at RM15.60/share, pegging the stock to FY19 P/BV of 3.0x supported by an ROE of 15.3%. No changes to our estimates.
  • We met the management recently for updates. We understand that BNM will review Phases 1 and 2 of the adjustments to the fire and motor tariffs that have been completed after June 2019. Also, the central bank will assess the readiness of consumers and industry players for further liberalization in the sector.
  • Recall, tariff rates for motor are already liberalized, with the impact fully felt by industry players. The changes have further lowered underwriting margins for motor products, which the group is already experiencing high claims.
  • For fire insurance, these products are still subjected to tariff rates albeit at lower pricing after Phase 2 of the liberalization. Going forward, more pressure is anticipated on the premiums for fire. This could see a decline by 10–15% in the product’s underwriting margin should there be further easing of the tariff pricing. Nevertheless, we do not expect any major market disruptions should the sector liberalizes further. This is based on the impact seen from the full liberalization of the motor insurance pricing.
  • To mitigate the pricing pressure on motor and fire products, new products with additional coverage need to be introduced. These new products can be priced at a premium to tariff rates. Based on BNM’s guidelines, pricing for new fire and motor products with additional coverage could be in the range of +/- 30% and +/- 10% from the tariff rates respectively.
  • On fire insurance, the smaller segment (SMEs) makes up 60% of the group’s total fire policies and 40% of the all fire premiums. Meanwhile, for the mid and larger segment’s fire insurance, these comprised 40% of its total fire policies and 60% of the total fire premiums. LPI Capital has a market share of 17.0% on fire insurance and is still ranked number one.
  • Malaysian Motor Insurance Pool (MMIP) is gradually shrinking as some of the motor insurance business have been insured directly by companies. We gather that insurers are underwriting more of the motor insurance directly, leveraging the flexibility in pricing. Arising from this, insurance companies are expected to make lesser contributions to MMIP, resulting in a lower drag on their earnings in the future.
Source: AmInvest Research - 19 Feb 2019

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