Investment Highlights

• We maintain HOLD on LPI Capital (LPI) with an unchanged fair value of RM14.40/share, based on FY23 P/BV of 2.3x, supported by an ROE of 15.3%. We make no changes to our earnings estimates and our 3-star ESG rating.

• Our forecasts are unchanged as 1Q22 core earnings of RM70mil (-15.4% YoY,) excluding the one-off impact from the computational change of unearned premium reserve (UPR) net of tax, were within expectations, making up 20% of our and 20.9% of consensus estimate.

• LPI reported a lower 1Q22 net profit after tax of RM62mil (- 25.2% YoY). This was attributed to lower investment income from a drop in dividends received from equity investments (mainly Public Bank shares). Also, it was due to higher net claims after the reopening of the economy.

• The group adopted a more conservative computation formula on UPR for its mortgage-related personal accident insurance portfolio. This has resulted in the recognition of a higher net UPR by RM14.8mil in 1Q22.

• Nevertheless, the net impact of the change in methodology to the group PBT was only RM10mil in 1Q22 after differing commission expenses.

• The Dec 2021 major flood increased reinsurance cost by RM10.4mil. RM4mil of the higher cost was recognised in FY21. 1Q22 saw the group incur a further RM6.4mil for the reinstatement of reinsurance.

• In 1Q22, growth in gross written premium (GWP) was modest at 1.2% YoY, underpinned by higher premiums from the marine, aviation, transit and miscellaneous segments.

• NEP declined by 14% YoY in 1Q22 due to higher UPR and lower retention ratio. LPI’s retention ratio slid to 58.9% in 1Q22 vs. 63.5% in 1Q21.

• Underwriting margin for 1Q22 slipped to 23.7% as claims for key segments, including fire and motor, continued to normalise after the reopening of the economy.

• The combined ratio for 1Q22 climbed to 76.3%, contributed by an increase in claims and management expense ratios.

• The stock is fairly valued trading at 2.2x FY23 P/BV with balanced risk and reward. A decent dividend yield at 5.7% for FY23 is seen as supportive of share price.

Source: AmInvest Research - 15 Apr 2022