We believe the insurance space will be challenged by greater price competition from new tariff liberalisation phases. Meanwhile, stabilisation of claims and reinsurance ratio may ease earnings pressures. The newly implemented MFRS 17 should translate to better earnings presentation, as prior conservative provisional methods should moderate. Buy with TP of RM14.10 based on an unchanged 2.5x FY23F PBV, based on a 25% premium against the historical forward PBV of industry peers. At current price levels, we believe there are buying opportunities as LPI’s premium remains justified based on its better dividend prospects and earnings, plus support from its affiliation with Public Bank.
Oct 2022 saw fire tariffs reduced by 15% as part of Bank Negara’s efforts to liberalise the industry. As the segment makes up 40% of LPI’s gross premiums and c.60-70% of underwriting surplus before management expense, earnings may be impacted from heightened competition The motor segment could see further detariffication by 20%. This insurance class is also one of the costlier segments in terms of claims ratio with inflationary pressures raising claim values.
Prior quarters demonstrated higher claims ratio (c.45%) against the Covid periods (c.35%). The group believes that recent highs could be due to more aggressive return of movements. Meanwhile, the group saw reinsurance rates spike on the back of Dec 2021 floods which have put strains on reinsurance coverage in 2022. We believe that as most risk factors are identified and coverages confined, it is possible that reinsurance levels could revert to lower levels, though the group believes it could be unlikely to see historical levels (<35%) in the near term.
1st Jan 2023 will see a more even distribution in underwriting revenue recognition over a policy’s term, which would undermine accounts that report lumpier revenues during their earlier periods. LPI may experience a reversed trend as prior practices implied higher provisioning and less revenue reported in earlier periods. Hence, complying to MFRS 17 may in effect bolster recognition on an overall basis.
Source: Rakuten Research - 9 Jan 2023
