Investment Highlights

• We maintain our HOLD call on LPI Capital (LPI) with an unchanged FV of RM16.40/share supported by FY20 ROE of 15.4% leading to P/BV of 2.9x which is in line with its 5-year historical average PB. We see limited upside with the stock already trading at 2.7x PB. We make no changes to our earnings estimates.

• LPI recorded a higher core net profit of RM88mil (+24.1% QoQ) in 3Q19 underpinned by an increase in net earned premium (NEP) and investment income.

• 9M19 earnings of RM236mil improved marginally by 2.5% YoY supported by higher NEP and investment income partially offset by a rise in net claims. Cumulative net profit was within expectations, making up 73.1% of our and 70.7% of consensus estimates.

• 9M19 gross written premium (GWP) slowed down to a growth of 3.6% YoY. Growth in GWP was driven largely by fire, motor as well as marine, and aviation and transit insurance. Lonpac is ranked 3rd in terms of GWP with a market share of 8.6% in the Malaysian general insurance industry. We understand that a substantial portion of Public Bank borrowers’ fire insurance has already converted to the group’s new innovative fire coverage with additional protection benefits at a slightly lower premium. Nevertheless, there remains some pressure on the pricing for fire insurance.

• The group’s 9M19 NEP grew 10.2% YoY to RM746mil supported by higher retention ratios for fire and motor insurance.

• Group underwriting (UW) margin for 9M19 deteriorated to 27.5% vs. 30.7% in 9M18 impacted by competitive pressure on premiums post-liberalization of the fire and motor insurance. UW margin was also affected by higher net claims and lower commission income from an increase in retention ratio to 66.8%.

• Claims ratio in 9M19 rose to 45.2% vs. 41.6% in 9M18. Claims increased from the fire, marine, aviation & transit and miscellaneous (medical and accidental classes) segments. LPI plans to slow down the underwriting of policies for medical insurance to mitigate the risk of higher claims.

• Management expense ratio improved to 20.5% while the commission ratio rose slightly to 6.7% for 9M19 attributed to lower reinsurance commissions.

Source: AmInvest Research - 16 Oct 2019