Investment Highlights

• We maintain our HOLD recommendation on LPI Capital (LPI) with an unchanged fair value of RM13.60/share. Our fair value is based on FY21 P/BV of 2.6x, supported by an ROE of 17.1%. We make no changes to our earnings estimates.
• LPI recorded a subdued core net profit of RM77mil (-0.7% QoQ) in 2Q20. This was attributed to lower investment income and higher claims expenses despite posting a higher net earned premium (NEP) in the quarter.
• 6M20 core earnings of RM155mil grew 5.0% YoY, contributed by stronger commission income and fair value gains from investments of RM4.7mil largely through the adjusted value in unit trusts invested by the group. Cumulative net profit was within expectations, making up 48.4% of our and 51.2% of consensus estimate respectively.
• 2Q20 gross written premium (GWP) fell 7.0% YoY to RM341mil due to movement control order (MCO) which disrupted business activities. Lower premiums were written for the motor, marine, oil & gas and the miscellaneous classes of insurance in 2Q20. Nevertheless, NEP only declined marginally by 0.6% YoY in 2Q20 due to lower technical reserves. The group registered a slightly higher retention ratio of 65.9% in 2Q20 vs. 1Q20. For 6M20, LPI posted a modest decline in GWP by 0.1% YoY to RM827mil.
• Underwriting margin rose slightly to 28.4% in 6M20 vs. 26.9% in 6M19, supported by lower net commission expenses and a moderate drop in net claims.
• Claims ratio remained elevated at 45.9% in 6M20 compared with 46.1% in 6M19. This was attributed to motor claims which stayed high while that for fire insurance climbed to 14.6% for 6M20 (6M19: 13.5%) Nevertheless, claims ratios for the marine, aviation & transit and the miscellaneous segments improved YoY.
• Management expense ratio improved marginally to 19.1%. Meanwhile, commission ratio declined to 4.6% for 6M20. This was due to higher commission income as the group ceded more of its premiums to reinsurers. The group’s combined ratio for 6M20 improved to 69.6% (6M19: 73.1%), close to our estimate of 71.3% for FY20.

Source: AmInvest Research - 18 Aug 2020