Investment Highlights

• We keep our HOLD call on LPI Capital (LPI). We revise our fair value to RM15.30/share from RM16.40/share as we lower our FY20 BV/share estimate after factoring in the actual shareholders’ equity for FY19.

• The group’s FY19 shareholders’ equity was lower due to a drop in fair value reserves. This was contributed by marked-to-market losses on equities (FVOCI securities) of RM232.9mil. We believe these are Public Bank shares held by the group. Our valuation is supported by an ROE of 15.8% leading to a P/BV of 2.9x. We fine-tune our FY20/21 net profit by 7.8%/7.6% by adjusting commission expenses’ estimates and raising the projection for taxes.

• LPI reported a marginally lower core net profit of RM87mil (-1.4% QoQ) in 4Q19 attributed to higher tax expenses. 12M19 core earnings came in at RM322mil (+2.6% YoY) underpinned by stronger net earned premium (NEP) although partially offset by higher net claims, commission and management expenses.

• Cumulative earnings were in line with our expectation, making up 99.6% of our estimate. Meanwhile, it accounted for 99.7% of consensus projected profit.

• 12M19 gross written premium (GWP) grew modestly by 3.7% YoY contributed largely by motor and marine, aviation & transit premiums. Meanwhile, growth in GWP of fire insurance was tepid at 1.3% YoY. Nevertheless, its NEP rose by 8.7% YoY as the group ceded a lower portion of the fire and motor premiums to reinsurers. This has resulted in its retention ratio climbing to 67.6% in 12M19 vs. 65.8% in 12M18.

• The liberalization of fire and motor insurance has resulted in a competitive pricing for premiums for the general insurance industry. The group was not spared from this and its underwriting margins slipped to 29.6% in 12M19 vs. 32.1% in 12M18.

• Claims ratio rose to 43.9% in 12M19 compared with 40.9% in 12M18. This was attributed to the rise in claims from the marine, aviation & transit and miscellaneous segments, particularly, the health and medical class of insurance. Meanwhile, claims ratio for motor insurance remained elevated at 72.4% in 12M19 vs. 73.4% in 12M18.

• Management expense ratio was stable at 19.1%. Commission ratio rose slightly to 6.8% in 12M19 largely due to higher commission expenses. The group’s combined ratio for 12M19 increased slightly to 69.8% (12M18: 67.3%) and was marginally lower than our estimate of 71.5%.

Source: AmInvest Research - 4 Feb 2020