Investment Highlights

• We maintain our HOLD call on LPI Capital (LPI). We revise our fair value to RM16.40/share from RM16.70/share with a lower ROE of 15.4%, leading to a P/BV of 2.9x (previously: 3.0x). Our FY19/20 earnings have been trimmed by 3.0%/4.6% to RM323mil/RM345mil after imputing higher claims ratio assumption of 44.4%/44.1% vs. 41.5%/40.5% previously.

• LPI reported a core net profit of RM71mil, a decline of 8.3% QoQ in 2QFY19. The lower earnings were due to a drop in investment income despite an increase in net earned premium (NEP) from a higher retention ratio for the quarter.

• 1HFY19 earnings of RM148mil (+7.0% YoY) were slightly lower than expectations, making up 44.4% of both our estimate and consensus projected profit.

• 1HFY19 gross written premium (GWP) grew 5.1% YoY contributed by growth in fire, motor and miscellaneous segments’ premiums. Premium pricing was under pressure particularly for fire insurance. The group’s NEP climbed 10.4% YoY to RM488mil on a higher retention ratio to 67.1% (1HFY18: 64.4%). It ceded lower fire and motor premiums to reinsurers compared with 1HFY18.

• In our earlier report, we highlighted that BNM will review phases 1 & 2 of the liberalization of the motor and fire insurance tariffs by 1HFY19. Recall, the motor tariff has already been fully liberalized, leaving fire products which are still subjected to tariff rates. The full liberalization of the pricing for fire insurance is imminent. However, we understand that the aforementioned review by BNM before the next phase of liberalization has now been delayed for a year from 30 June 2019 to 30 June 2020. This is expected to provide some relief to the pricing of fire insurance from further competitive pressure for the time being. To compete effectively in the market, more innovative insurance products are anticipated to be launched by the group.

• The group’s underwriting margins slipped to 26.9% in 1HFY19 vs. 28.8% in 1HFY18. Contributing to this was competitive pressure on premiums post-liberalization of fire and motor insurance. Also, higher net claims and lower commission income arising from an increase in retention ratio contributed to the decline.

• Claims ratio in 1HFY19 rose to 46.1% from 44.0% in 1HFY18 attributed to higher claims from the marine, aviation & transit and miscellaneous segments. Nevertheless, 1HFY19 saw an improvement in the net claims for fire and motor insurance.

Source: AmInvest Research - 16 Jul 2019