Investment Highlights

• We maintain HOLD on LPI Capital (LPI) with a lowered fair value of RM12.80/share from RM14.40/share.

• Our revised fair value is based on FY23F P/BV of 2.1x, supported by an ROE of 14.2%. We make no changes to our 3-star ESG rating.

• LPI’s 6MFY22 core earnings were below expectations, making up only 36% of our FY22F net profit and 39% of consensus. The variance to our expectation was mainly due to higher-than-expected claims (surge in motor claims).

• Hence, we trim our FY22F/23F/24F earnings by 20.5%/9.6%/8.7% to factor in high claims ratio assumptions of 47%/45%/44% from 42%/41%/40% previously.

• In 6MFY22, core earnings came in at RM127mil, a decline of 23.8% YoY driven by lower net earned premium (NEP), investment income and higher net claims.

• 6MFY22 gross written premium (GWP) grew modestly by 1.0% YoY underpinned by higher premiums from the motor, marine, aviation, transit and miscellaneous segments.

• NEP declined by 5.8% YoY in 6MFY22 due to an increase in net unearned premium reserves (UPR) in 1Q22. Recall in 1Q22, LPI changed the computation of the UPR formula for its mortgage-related personal accident insurance portfolio. LPI’s retention ratio was marginally higher at 62.8% in 6MFY22 vs. 62.3% in 6MFY21.

• Underwriting margin for 6MFY22 slipped to 25%, contributed by claims for key segments including fire and motor which continued to normalise after the reopening of the economy.

• The higher motor claims were the result of more vehicles on the road after the removal of mobility restrictions as well as higher awards by courts for third party bodily injury claims. Elsewhere, claims from the miscellaneous segments (engineering and medical insurance) were also higher.

• LPI reported a weaker 2QFY22 net profit after tax of RM57mil (-18.2% QoQ). This was largely attributed to higher motor claims and fair value losses of RM7mil on the group’s fixed income securities and unit trust funds.

Source: AmInvest Research - 3 Aug 2022