LPI Annual Report 2009 (Summary)

  LPI Annual Report 2009

Underwriting Surplus before Management Expenses By Class

RM’000                           Underwriting Surplus before management expenses
                                                                        2009                  2008
Fire                                                               93,030                68,603
Motor                                                           19,312                30,366
Marine, Aviation & Transit                       6,100                  5,290
Miscellaneous                                                54,997               38,083
Total                                                           173,439              142,342


SUMMARY OF GROUP FINANCIAL PERFORMANCE
At A Glance


                                                              2009 RM’000          2008 RM’000
Profit Before Taxation                                  161,335               141,564
Profit After Taxation                                     126,088               104,247
Total Assets                                              1,488,697               856,201
Shareholders’ Equity                                    900,673               363,741
Basic Earnings Per Share (sen)                           91.6                     75.7
Return on Equity (“ROE”)                                14.0%                14.0%*
Operating Margin                                              21.7%                 22.1%
Net Claims Incurred                                          46.7%                 51.2%

*Restated ROE after taking into account of FRS 139 adoption.



Profit Before Taxation By Segment
                                                                    2009 RM’000      2008 RM’000
General Insurance Operations                           126,311              108,679
Investment Holding                                             34,097                32,322
Financing of Leases                                                    (1)                   (34)
                                                                        160,407              140,967
Share of profit after tax of
equity accounted associated
company                                                                  928                    597
Profit Before Taxation                                       161,335              141,564



RM’000                 Fire          Motor       M.A & T#     Miscellaneous      Total
Gross premium     229,381    194,406       23,446          228,013        675,246
%                          34.0         28.8              3.5                 33.7             100.0
Underwriting
surplus before
management
expenses               93,030      19,312       6,100           54,997         173,439

Underwriting
surplus after
management
expenses               69,319       (9,724)      4,085           33,964           97,644


# Marine, Aviation and Transit




Class                  Total no. of policies    No. of policies per underwriting staff
                             2009        2008              2009         2008
Fire                    284,170     274,520          18,945      17,158
Motor                463,615     416,608          42,147       37,873
Marine, Aviation
& Transit             26,791       26,114            3,349        3,264
Miscellaneous    263,618     197,109            5,492        4,693
Total              1,038,194      914,351          12,661      11,875




Gross Premium By
Agents                                 27.3%
Financial Institutions             25.8%
Direct                                  14.7%
Broker                                 12.4%
Reinsurance Arrangement       5.6%




The statistics of claims registered and settled in 2008 and 2009 are as follows



Classes                         No. of claims registered             No. of claims settled
                                          2009      2008                         2009          2008
Fire                                    2,202      2,119                      1,188            915
Marine                                  849         719                         427            340
Personal Accident              5,667      6,730                       5,106        6,127
Miscellaneous                    2,404      1,768                       1,448           808
Health                                3,319      2,701                       2,589        1,841
Workmen Compensation    2,412      2,928                         997         1,183
Motor                              17,716    18,547                       8,892        7,264
Liability                              1,380      1,029                          467           219
Bond                                    333         123                          213             23
Aviation                                   1             0                              1               0
Engineering                           840        717                           321           161
Total                               37,123    37,381                      21,649      18,881



LPI has been consistent in its dividend payment since listed
in 1993. The gross dividend per share paid by LPI since
1993 is depicted below:

Year    Gross Dividend per share (sen)
2008     85.0
2007   110.0 N1
2006   105.0 N1
2005    70.0 N1
2004    60.0 N2
2003    25.0
2002    15.0*
2001    15.0*
2000    15.0*
1999    12.5*
1998    27.5
1997    40.0
1996    40.0
1995    30.0
1994    25.0
1993    18.0

* Tax Exempt

N1 - Including a special dividend of 25 sen less taxation

N2 - Including a special dividend of 30 sen less taxation

BALANCE SHEETS

AT 31 December 2009

                                                                      Group                    

                                                           2009              2008 

                                                           RM’000        RM’000 

Restated Restated

Assets

Plant and equipment                              6,290            6,435 

Investment properties                            9,487          10,947

Investment in subsidiaries                            -                     -     

Investment in associate                        12,230          11,482 

Investments                                                 -          725,903 

Available-for-sale financial assets       671,348                  - 

Held-to-maturity investments              172,515                 - 

Loans and receivables, excluding

 insurance receivables                         536,985         27,622

Insurance receivables                           69,904          60,735

Tax recoverable                                           -                    - 

Cash and cash equivalents                      9,938         13,077 

total assets                                      1,488,697        856,201 

equity

Share capital                                       138,723       138,723 

Treasury shares, at cost                        (8,628)         (8,611) 

Reserves                                            770,578        233,629

shareholders’ equity                            900,673        363,741

liabilities

Insurance liabilities

-  Claims liabilities                                229,021       242,654 

-  Premium liabilities                             222,545       188,258 

Deferred tax liabilities                                  557                   -     

Borrowings                                            72,880                  -     

Insurance payables                                 37,505         34,422 

Other payables                                      15,416          12,988 

Taxation                                                 10,100         14,138 

total liabilities                                        588,024        492,460 

total shareholders’ equity 

and liabilities                                       1,488,697      856,201

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/750d1c101e37ba4b482576b10032f4e8/$FILE/LPI-Page%20116%20to%20ProxyForm%20(3.2MB).pdf

Property/Casualty Insurance Accounting 101

Let us investigate how the PC insurance business works on an income statement and balance sheet.  Premium revenue (also known as earned premium) is used to fund claim payments (loss expense), sales commissions for insurance agents (commission expense), and operating expenses (OPEX).  Insurers typically express each of these expenses as ratios to earned premiums.  Claim expenses, for example, typically consume 75% of an insurer's net revenues.

Adding together these three ratios produces the combined ratio - an insurance company's key underwriting profit measures.  A combined ratio under 100 indicates an underwriting profit.  A combined ratio exceeding 100 indicates an underwriting loss.

Companies with combined ratios exceeding 105 for more than a short time have a difficult time recouping their losses via investment earnings, and this type of poor underwriting track record suggests that an insurer's competitive position is unusually weak.  Insurers unable to earn even the occasional underwriting profit will produce the industry's poorest returns and may be tempted to accept large investment risks to boost profitability.

Insurers also make money from investment income, which they often report as a ratio of premiums.  Adding the investment ratio to the combined ratio yields the operating profit ratio.  In many instances, investment income is a key profit determinant because it offsets underwriting losses.

On the balance sheet, the key asset for most insurers is investments.  In addition to float, most insurers invest a large portion of their own retained earnings as well.  The investments account reveals the size of an insurers investments relative to its asset base and details the asset allocation employed.  As a starting point, look for insurers with no more than 30% invested in equities (unless the company is run by Warren Buffett).

Finally, unearned premiums represent premiums received but not yet considered revenue.  This oddity reflects an accounting convention.  When an insurer receives a premium, it is deemed to earn it gradually across the year.  After all, if a customer cancels a policy, the insurer must refund that portion of the coverage not consumed.  After six months, an annual auto policy would be 50% earned, but half the premium would be considered revenue.  Before this occurs, the premiums are held in the unearned premium account, and the insurer is free to invest them.

Nirvana for an insurer is being able to consistently earn underwriting profits on a large, growing customer base.  In effect, this insurer would be getting paid to profit from investing other people's money and could retain this float indefinitely (as long as it grows).  Unfortunately, for investors, these situations rarely occur.

Insurers' business model

Insurers' business model

[edit]Underwriting and investing

The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept.

Profit can be reduced to a simple equation: 

Profit = earned premium + investment income - incurred loss - underwriting expenses.

Insurers make money in two ways:

1. Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks;
2. By investing the premiums they collect from insured parties.

The most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.

At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and comparing these prior losses to the premium collected in order to assess rate adequacy.^[8]Loss ratios and expense loads are also used. Rating for different risk characteristics involves at the most basic level comparing the losses with "loss relativities" - a policy with twice as money policies would therefore be charged twice as much. However, more complex multivariate analyses through generalized linear modeling are sometimes used when multiple characteristics are involved and a univariate analysis could produce confounded results. Other statistical methods may be used in assessing the probability of future losses.

Upon termination of a given policy, the amount of premium collected and the investment gains thereon, minus the amount paid out in claims, is the insurer's underwriting profit on that policy. An insurer's underwriting performance is measured in its combined ratio^[9] which is the ratio of losses and expenses to earned premiums. A combined ratio of less than 100 percent indicates underwriting profitability, while anything over 100 indicates an underwriting loss. A company with a combined ratio over 100% may nevertheless remain profitable due to investment earnings.

Insurance companies earn investment profits on "float". Float, or available reserve, is the amount of money on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or other income on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.^[10]

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held.

Naturally, the float method is difficult to carry out in an economically-depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.^[11]

[edit]

Claims

Claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for. Claims may be filed by insureds directly with the insurer or through brokers or agents. The insurer may require that the claim be filed on its own proprietary forms, or may accept claims on a standard industry form, such as those produced by ACORD.

Insurance company claims departments employ a large number of claims adjusters supported by a staff of records management and data entry clerks. Incoming claims are classified based on severity and are assigned to adjusters whose settlement authority varies with their knowledge and experience. The adjuster undertakes an investigation of each claim, usually in close cooperation with the insured, determines if coverage is available under the terms of the insurance contract, and if so, the reasonable monetary value of the claim, and authorizes payment.

The policyholder may hire their own public adjuster to negotiate the settlement with the insurance company on their behalf. For policies that are complicated, where claims may be complex, the insured may take out a separate insurance policy add on, called loss recovery insurance, which covers the cost of a public adjuster in the case of a claim.

Adjusting liability insurance claims is particularly difficult because there is a third party involved, the plaintiff, who is under no contractual obligation to cooperate with the insurer and may in fact regard the insurer as a deep pocket. The adjuster must obtain legal counsel for the insured (either inside "house" counsel or outside "panel" counsel), monitor litigation that may take years to complete, and appear in person or over the telephone with settlement authority at a mandatory settlement conference when requested by the judge.

If a claims adjuster suspects underinsurance, the condition of average may come into play to limit the insurance company's exposure.

In managing the claims handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome. Disputes between insurers and insureds over the validity of claims or claims handling practices occasionally escalate into litigation (see insurance bad faith).

[edit]

Marketing

Insurers will often use insurance agents to initially market or underwrite their customers. Agents can be captive, meaning they write only for one company, or independent, meaning that they can issue policies from several companies. Commissions to agents represent a significant portion of an insurance cost and insurers such as State Farm that sell policies directly via mass marketing campaigns can offer lower prices. The existence and success of companies using insurance agents (with higher prices) is likely due to improved and personalized service.^[12]

http://en.wikipedia.org/wiki/Insurance

Related:
Analyzing Insurance Stocks:  The Income Statement
http://myinvestingnotes.blogspot.com/2010/07/analyzing-insurance-stocks-income.html

Top 10 tricks used by Agents for misselling financial products

http://www.jagoinvestor.com/2010/01/top-10-tricks-used-by-agents-for-misselling-financial-products-and-how-to-deal-with-it.html

Analyzing Insurance Stocks: The Income Statement

http://streetcapitalist.com/2010/03/31/analyzing-insurance-stocks-the-income-statement/

Types of Insurance Products Purchased by the Public

Financial Protection – One Hell of a Service

Insurance services provide a wide range of financial protection that help people arrange finances for any eventuality. Therefore, it is needless to state that they are lapped up by people who also term this service as income protection.


http://www.findinsurancebroker.info/uk-broker-insurance-network

The recent budget introduces a mandatory basic insurance coverage

Insurance

A basic insurance and takaful scheme will be offered to provide mandatory basic insurance coverage for third party bodily injuries and death. The scheme is expected to be introduced by mid-2010.

Positive for insurance companies (Kurnia (NR), LPI (NR)) and banks with major insurance subsidiaries such AMMB (AmAssurance)

http://malaysiainfoedgezone.blogspot.com/2009/10/market-strategy-after-budget-2010-full.html

http://www.box.net/shared/uj9jmp9h63

Understanding insurance business

The management's view of the insurance business

Is the business profitable? Is the return on total capital excellent?

An insurance company has 2 streams of income, namely from:
• underwriting and
• investing.

Insurance company aims for long term total return. This involves strict discipline and nurturing proper behaviour. It can grow its business either organically or through acquisition. It can also grow by expanding its business overseas and into specialty insurance.

The assets allowed in the investment management portfolio of insurance company include:
• fixed income securities and
• equity securities.

Fixed income security is one where money invested is received with interest in a specific time. Equity security does not give explicit promises on returns.

In the balance sheet of the insurance company, the largest item of its source of fund (liability section) is the loss reserve. This is generally invested in high quality fixed income security (e.g. bonds), with the invested duration matching those of the claims and ensuring a positive spread. The other source of fund is the shareholders equity. There is never the need to repay this. Therefore, this can be invested with unlimited time horizon, usually in more conservative equity securities.

Here is what the management team of an insurance company hopes to achieve:

“The management hopes to compound book value per share over a long time for the business. This incorporates the total return from underwriting and investing, aiming for a ROE > 20%.
Underwriting can be in various types of insurances; including specialty niches. Insurance is a competitive business that is also cyclical. The incentive compensation plan for the employees shall be aligned to the results generated. We will always focus on the long term compound total return. The business shall be without excessive leverage, perhaps 1/3 debt and 2/3 equity. Though smooth and consistent results are to be expected in many industries or businesses, this is not so for the insurance business. The results can be lumpy at time, as the role of the insurance businesses is to smooth the losses incurred by the insured. For example, a hurricane can occur anytime and this may result in a lower profit or a loss that year. In the next year, the higher premium factoring the event, the profit may be better if no major calamity occurs. Therefore, we can expect and accept short term uncertainties in this insurance business. It is better to look at the rolling 5 years goal measurement which is also the one we aim for.”

Measuring talent and Integrity

Talent and integrity are difficult to measure in any business. In general, judge the future of the business by its past performance. Also, check that the compensation to the employee is fair. There should be no misappropriation of shareholder funds. There should be no stock option abuse. The management should be focused on the long term return. Reports to shareholders should be clear, concise and complete. There should be no excessive leverage. The management should have good honest relationship with the shareholders, always conscious that shareholders are the owners of the company.

Reinvestment dynamic

The future of the insurance business is bright. The insurance premium/GDP ratio is still low and trending upwards. There is a lot of room to grow this business. The business will grow when society grows. New insurance risks require new products, growing the insurance market. Growth can also be by reinvestment in new geographical areas.

Fair price

What is the role of the management in determining the share price?.

E.g. Valuing insurance company X
Price peaked at $550 giving a P/BV of 2x.
Historical P/BV 1.5 – 2.0x.
At today’s price of $300, P/BV is 1.3x

The managers of the insurance business have little or no control over the short term stock price swings. They should focus on building up the book value per share over the long term through superior underwriting and excellent investing. A good business should last a long period producing results to the investor over time.


Also read:
Great Eastern buys more S'pore stocks, eyes China equity marts