Investment Highlights

• We maintain our HOLD call on LPI Capital (LPI). We revise our fair value to RM16.70/share from RM15.60/share as well roll over our valuation to FY20. This is supported by an ROE of 16.2% leading to a P/BV of 3.0x. We keep our earnings forecast unchanged for now.

• LPI reported a core net profit of RM77mil which grew 6.3%YoY in 1QFY19. The increase was driven by higher net earned premium (NEP) and investment income, although partially offset by higher provisions for impairment losses on insurance receivables of RM3.3mil.

• 1QFY19 earnings were within expectations making up 23.1% of our estimate and 22.8% of consensus projected profit.

• 1QFY19 gross written premium (GWP) fell by 4.6%YoY contributed by the contraction in the marine, aviation & transit and miscellaneous segments’ premiums. Apart from the pressure on its premium pricing from the liberalization of fire and motor insurance, the group also recorded lower project insurances due to the delays in government infrastructure projects. Despite this, its NEP jumped 8.9%YoY arising from the group ceding a lower portion of its premiums, mainly motor, to reinsurers. This resulted in the group’s retention ratio climbing to 65.8% compared with 61.9% in 1QFY18.

• Phase 2 of market liberalization is already in force. We understand that BNM will review the progress of Phases 1 and 2 of the liberalization by 1H19. Recall that motor tariff is already fully liberalized, leaving fire products which are still subjected to tariff rates. The full liberalization of the pricing for fire insurance is imminent. We continue to anticipate stiffer competition and pressure on the underwriting margins for fire products ahead once the fire insurance has been fully liberalized.

• The group’s underwriting margins slipped to 26.1% in 1QFY19 vs. 26.8% in 1QFY18. Contributing to this was the compression in premium pricing after the liberalization of fire and motor insurance coupled with higher net claims and lower commission income.

• Claims ratio increased marginally in 1QFY19 to 47.4% attributed to the rise in claims from the marine, aviation & transit and miscellaneous segments. This was higher than our forecast of 41.5% for FY19. On the motor segment, although claims ratio has improved to 70.6% compared with 84.8% in 1QFY18, it has remain elevated.

• Management expense and commission ratio of 21.2% and 5.2% respectively were in line with our estimates. Nevertheless, the group’s combined ratio for 1QFY19 of 73.9% was still slightly higher than our projection of 68.6% for FY19 due to a higher claims ratio.

Source: AmInvest Research - 16 Apr 2019