Investment Highlights

• We maintain our HOLD call on LPI Capital (LPI) as the stock continues to trade at a rich valuation of 3.3x to our FY19 BV/share estimate. Our fair value of RM15.30/share remains unchanged, pegging the stock to FY19 P/BV of 3.0x supported by an ROE of 15.9%.

• LPI reported an improved core net profit of RM92mil (+39.6%QoQ) in 3QFY18 attributed to a higher net earned premium (NEP), rise in investment income and decline in claims expenses.

• The group reported a 9MFY18 core net profit of RM230mil with a subdued growth of 1.0%YoY. Cumulative earnings remained flattish dampened by higher claims, commission and management expenses. 9MFY18 core earnings were within expectations, accounting for 80.0% and 73.2% of our and consensus estimate respectively.

• 9MFY18 gross written premium (GWP) grew modestly by 2.2%YoY. This was despite the slowdown in the insurance of infrastructure projects in which the group has been an active player in. Nevertheless, 9MFY18 NEP rose 8.6%YoY due to lower ceding of premiums to reinsurers. This was evidenced by a lower reinsurance ratio of 35.6% (9MFY17: 39.7%).

• With phase 2 of market liberalization in force, we understand that premium rates for motor insurance have been highly competitive. This, coupled with the higher claims ratio for the segment, have resulted in the decline by 20.2%YoY in the group’s underwriting profit before management expenses for motor in 9MFY18.

• For fire insurance, underwriting profit before management expenses for this segment climbed 8.2%YoY in 9MFY18. The claims ratio for fire improved to 12.9% while the commission ratio was slightly higher at 6.4% for 9MFY18.

• Despite the improvement in the claims ratio in 3QFY18, the combined ratio for 9MFY18 remained higher at 69.3% vs. 66.5% in 9MFY17. The motor segment’s claims ratio climbed to 74.9% in 9MFY18 (9MFY17: 70.9%) owing to an increase in claims frequency and quantum as well as a non-repeat in release of reserves from the Malaysian Motor Insurance Pool (MMIP) as in the 9MFY17. The miscellaneous segment’s claims ratio also rose to 50.7% in 9MFY18. We believe that this has been contributed by a rise in medical insurance claims. Meanwhile, the claims ratio for fire and marine, aviation and transit insurance for 9MFY18 improved to 17.6%.

• Elsewhere, the commission ratio edged up to 5.9% with a lower commission income while the management expense ratio was stable at 21.9% for 9MFY18.

Source: AmInvest Research - 11 Oct 2018