Investment Highlights

• We maintain HOLD on LPI Capital (LPI) with a slightly lower fair value of RM12.60/share from RM12.70/share previously. Our revised fair value is based on FY23F P/BV of 2.2x supported by ROE of 14%. No changes to our neutral 3-star ESG rating.

• We trim FY23F/24F earnings by 5.1%/5.6% after tweaking our estimates for net earned premium (NEP) lower to account for higher reinsurance cost.

• LPI recorded an improved underlying net profit of RM84mil (+11.8% QoQ) in 4QFY22 underpinned by a higher NEP and lower management expenses.

• FY22 core earnings of RM285mil (-17.3% YoY) were within our expectation, coming in 3% above our forecast. Meanwhile, it was slightly above consensus, 9% ahead of street estimates.

• The decline in the group’s FY22 earnings was contributed by lower NEP and investment income while net claims rose. FY22 saw an increase in claims from the motor, medical and engineering class of insurance.

• Gross written premium (GWP) grew modestly by 4.3% YoY in FY22, supported by higher premiums from the fire, motor, marine, aviation, transit and miscellaneous segments.

• Nevertheless, LPI’s NEP contracted by 2.3% YoY in FY22 due to higher net unearned premium reserving (UPR). LPI’s retention ratio was marginally higher at 63.5% in FY22 vs. 62.8% in FY21.

• Underwriting margin in FY22 slipped to 28% from 37% in the preceding year. The decline was driven largely by higher claims for the miscellaneous segment as well as motor insurance.

• In FY23F, we project a claims ratio of 45% vs. 44% in FY22. The ratio is expected to remain elevated due to inflationary pressures impacting claims from the motor insurance portfolio as well as medical expenses.

Source: AmInvest Research - 8 Feb 2023