Investment Highlights

• We maintain our HOLD call on LPI Capital (LPI) as the stock continues to trade at a rich valuation of 3.4x to our FY18 BV/share estimate. We have trimmed our earnings estimates for FY18/19/20 by 12.5%/11.2%8.7% after factoring in higher claims and management expense ratio assumptions. We have rolled over our valuations to FY19 and revised our fair value to RM15.30/share from RM15.60/share pegging the stock to a P/BV of 3.0x (previously: 3.1x) supported by a lower ROE of 15.9%.

• LPI reported a core net profit of RM66mil (-9.4%QoQ) in 2QFY18 attributed to a lower investment and commission income as well as higher tax expenses.

• 1HFY18 core net profit was flat at RM138mil (+1.8%YoY). The subdued earnings were attributed to a higher NEP which was partially offset by rise in claims from motor and miscellaneous accident classes, coupled with an increase in management expenses.1HFY18 core earnings were below expectations, accounting for 42.1% of our and 42.2% of consensus estimate. The variance was largely due to incurred claims which remained higher than our expectation, particularly on motor insurance.

• 1HFY18 NEP grew 12.7%YoY supported by a higher GEP (+4.6%YoY) and retention ratio. With phase 2 of market liberalization in force, we gather that premium rates for motor insurance continued to be highly competitive putting pressure on profit margins.

• The group’s retention ratio rose in 2QFY18 resulting in an increase to 64.4% in 1HFY18. This was higher than our expectation of 61.8% for FY18. We understand that this was contributed by a higher retention of premiums for motor insurance.

• The claims ratio in 1HFY18 surged to 44.0% compared to 39.8% in 1HFY17. Motor segments’ claims ratio climbed to 80.6% in 1HFY18 (1HFY17: 68.9%) owing to an increase in claims frequency and quantum as well as a non-repeat in release of reserves from Malaysian Motor Insurance Pool (MMIP) as in the 1HFY17. The miscellaneous segment’s claims ratio also rose to 53.0% in 1HFY18. We believe that this has been contributed by a rise in medical insurance claims. Meanwhile, claims ratios for fire and marine, aviation and transit insurance improved in 1HFY18 vs. 1HFY17. Elsewhere, commission ratio edged up to 4.9% with an increase in commission expense while management expense ratio improved slightly to 22.4% in 1HFY18. Combined ratio in 1HFY18 rose to 71.2% (1HFY17: 67.8%)

• An interim dividend of 26 sen/share been proposed for 1HFY18 (payout: 75.0%), slightly lower than 27.0 sen/share in 1HFY17.

Source: AmInvest Research - 10 Jul 2018