Investment Highlights

• We maintain HOLD on LPI Capital (LPI) with unchanged fair value of RM14.30/share. Our fair value is based on FY22 P/BV of 2.4x, supported by ROE of 15.9%. Keeping our earnings estimates unchanged.

• LPI registered a modest improvement in net profit after tax of RM84mil (+2.0% QoQ) despite a lower net earned premium (NEP) and investment income in 2Q21. This was contributed by the non-repeat of the substantial fair value (FV) losses of RM34.6mil in fixed income unit trust investments in 1Q21 and lower net claims.

• Cumulatively, 6M21 net profit came in at RM166mil (+7.0% YoY). The improved earnings were largely supported by lower claims incurred and marginal growth in NEP.

• 6M21 core earnings were within expectations, making up 47.6% of our and 47.8% of consensus estimate.

• In 6M21, GWP grew by 1.6% YoY to RM840mil supported by higher premiums from the motor, marine, aviation and transit (MAT) and miscellaneous segments. Meanwhile, GWP for fire insurance, the largest segment of LPI’s portfolio slipped 1.6% YoY. We believe that this has been contributed by the decrease in renewals of fire policies.

• LPI’s retention ratio slid to 62.3% in 6M21 with higher motor and MAT premiums ceded out to reinsurers.

• Underwriting margin for 2Q21 slipped to 34.9% vs. 36.4% in 1Q21 mainly due to higher management expenses. For 6M21, the group’s underwriting margin rose to 35.7% underpinned by lower claims and higher NEP while commission and management expenses have been well contained.

• Claims ratio fell to 37.4% in 6M21 vs. 45.9% in 6M20, supported by lower claims for fire, motor and miscellaneous segment. Key driver for the decline was the improvement in claims ratio for motor which is likely to normalized moving forward. Once the number of Covid-19 cases have been contained with the vaccination covering a higher percentage of the population completed, more economic sectors are likely to be opened resulting more traffic on the roads. This will in turn lead to higher claims ratio for motor.

Source: AmInvest Research - 6 Aug 2021