LPI Capital Bhd
(Oct 21, RM15.30)
Maintain hold with an unchanged target price (TP) of RM15.90: In the domestic market, the general insurance industry saw a 1.4% year-on-year (y-o-y) decline in gross written premium (GWP) for the first half of 2019. The motor insurance industry registered flat growth y-o-y while fire insurance grew 2.5% y-o-y. Although LPI Capital Bhd has continuously outperformed industry growth, expectations of flat car sales growth in 2020 and more competition in the fire insurance market could potentially increase downside risks to our estimated 2020 (2020E) GWP assumption of 4% y-o-y.

According to Bank Negara Malaysia, industry trends show general insurance claim ratios are creeping up, from 57.5% in 2017 and 58% in 2018 to 59.6% as at June 2019. These were attributable to the medical and health insurance class (due to medical inflation, estimated at mid-teen growth in 2019), persistently high motor claims (due to rising accident cases) and more large-scale marine, aviation and transit claims. Inevitably, LPI was hit the same as well in its miscellaneous class.

We note general insurance industry players have set up a task force to identify the cost drivers of medical inflation. In our view, recommendations to the authorities and a concerted effort to bring medical cost lower will be a catalyst for the general insurance players’ profits.

We reiterate our “hold” rating on LPI, with a TP of RM15.90 based on a 3.09 times price-to-book value target on estimated financial year 2020 (FY20) book value per share of RM5.15. We maintain our FY19E-21E earnings forecasts for LPI, based on the assumptions of GWP growth of about 4%, net earned premium growth of 8-9%, and net claim ratio of 44-45%. Downside/upside risks are rising/declining medical cost inflation. — Affin Hwang Capital, Oct 21