How Investors Can Understand The Investments LPI Capital Berhad Is Making

Credit: Simon Cunningham

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 91%.

This prompted me to learn more about the company’s business. 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.

Insurance companies tend to earn their keep through two means: By underwriting insurance policies and by investing their shareholders’ equity as well as the insurance premiums they collect.

In this article, I’m going to take a closer look at LPI Capital’s investments.

Investment types

First of all, let’s study the different types of investments that the company invests in. LPI Capital invests mainly in two types of investment vehicles: Fixed income and equities.

The former includes government debt, corporate bonds, fixed deposits and more. The latter consists mainly of Malaysia-listed stocks.

In LPI Capital’s financial statements, it classifies its investments in equities as “Available-for-sale” and its investments in fixed income vehicles as “Held-to-maturity,” “Loans and receivables, excluding insurance receivables,” and “Cash and cash equivalents.”

As of December 2016, LPI Capital’s fixed income and equities investments are worth RM890 million and RM1.83 billion, respectively.

Returns of investments

We now move on to how LPI Capital’s investments deliver returns.

For fixed income vehicles, the main form of return is from interest income. As for equities, returns are generated from dividends and capital appreciation of the stocks.

In LPI Capital’s profit and loss statement, its interest and dividend incomes are usually summarised under the heading “Investment income.” In 2016, investment income for LPI Capital was RM88.9 million.

As for capital appreciation, it’s useful that investors pay attention to the “Other Comprehensive Income” section of LPI Capital’s profit and loss statement. As of December 2016, LPI Capital’s unrealised capital appreciation is RM57.8 million.

The nature of returns

The third spoke of the wheel we’re studying regarding LPI Capital’s investments would be the nature of the returns that come with the different types of vehicles.

Among the three main types of returns, namely, interest income, dividend income, and capital appreciation, the former two are relatively certain while the latter depends mainly on the performance of Malaysia’s stock market.

Furthermore, interest income and dividend income are recurring in nature while capital appreciation could occur in fits and spurts.

Putting all together

In sum, the recurring investment return of LPI Capital in 2016 (excluding capital appreciation) is 3.27% (RM88.9 million in investment income divided by the sum of the value of fixed income and equities investments).

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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.