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How Does The Insurance Company LPI Capital Berhad Make Its Money?

LPI Capital Berhad (KLSE: 8621.KL) is a general insurance company listed in Malaysia. It has business in three countries, namely, Malaysia, Singapore, and Cambodia.

The term ‘general insurance’ can seem a little vague, so here’s more colour on LPI Capital’s business. The company essentially offers a range of insurance products such as fire insurance, motor insurance, marine insurance, and more.

LPI Capital’s stock has performed well in the last five years, with its price climbing by 90%.

This prompted me to learn more about the company and how it makes its money. Investors in Singapore-listed insurance companies such as United Overseas Insurance Limited (SGX: U13) may find it interesting to have a deeper understanding of LPI Capital’s business.

There are two ways that LPI Capital makes money. The first is by providing insurance products.

An insurance business works by first receiving insurance premium, then paying out those premiums in the form of claims by customers and administrative expenses. If the premium received is higher than the claims paid and administrative expenses, an insurance business is profitable.

In 2015, LPI Capital recorded RM707 million in net earned premium. If we deduct net claims incurred of RM289.9 million and other expenses of RM181.3 million, we are left with an insurance profit of RM238.5 million.

The next way comes from LPI Capital’s investing activities. This bucket is termed as investment income. The insurer’s investment income can be further split into two segments. The first is recurring in nature and comes from the interest earned on fixed income instruments (think bonds) and/or dividends from stocks. The second is non-recurring and comes from the capital gains on the financial assets held by LPI Capital.

Since LPI Capital receives premiums in advance before paying them out as claims and expenses, the premiums can be invested in income generating financial assets such as bonds and stocks. In addition, LPI Capital can invest its own shareholders’ equity too.

In 2015, LPI Capital’s recurring investment income was RM79.22 million whilst the capital gain was RM 76.16 million. The latter came from a total investment portfolio estimated at about RM2.7 billion in size (this includes cash and cash equivalents of RM0.95 billion).

When we take both the insurance and investment profits together, we can calculate the operating profit for LPI Capital in 2015 to be RM391.1 million.

By breaking down the business of LPI Capital into two separate parts, investors can better assess each component of the insurer’s business and form a sharper view on the company’s prospects. This can also be done for most of the other insurance companies out there, including those listed in Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.