Public Bank owned insurer, LPI’s first nine months earning report of RM193million which is down 29% is within expectation said Kenanga Investment as higher claim ratios were not surprising.
Kenanga feels the challenges in the fire insurance segment could be mitigated by its firm positioning in the space while ROE could remain buoyant from pending accounting adjustments. 9MFY22 met expectations. The nine-month reported net earnings of RM193 million made up 77% of the full-year forecast but missed the consensus full-year estimate. The research house believes the negative deviation on the street’s part was due to under-accounting of rise in claims from the re-opened economy. No dividends were declared this quarter as the group typically pays biannually.
There was also softening in the key fire insurance segment’s NEP and Motor although the minor Marine, Aviation & Transit segment supported earnings. A stable retention ratio suggests risk profiling could be optimal but the claims ratio rose to 45.4% as claims instances normalise on returning economic activity. This was the leading driver for a higher combined ratio (73.9%, +11.0 ppt) during the period, which translated to a 9MFY22 net profit of RM193 million.
The detariffication of the group’s key fire insurance segment could pose some top-line stress to the group amidst more liberal pricing ranges in the market. Possible compression of housing loan applications in a rising interest rate environment may further exacerbate the situation. On the flipside, continual demand for new automobiles could translate to supportive motor premium readings in the coming quarters.
Meanwhile, Kenanga believes pressure from claims would stabilise in the near term which may keep retention rates at more optimal levels. Historically, claim readings averaged 40% against YTD levels of 45%.
Forecast post results, Kenanga is leaving its FY22F/FY23F assumptions unchanged however has upgraded the stock to Outperform from earlier market perform. At current price levels, the house believes there are buying opportunities as LPI’s premium remains justified based on its better dividend prospects and earnings, notwithstanding support from its affiliation with Public Bank. Additionally, the group may be a beneficiary of 2023’s new MFRS 17 adjustments owing to their higher mix of longer-termed policies.
