LPI is a general insurance player with key presence in Malaysia as well as in Singapore and Cambodia. Its superior and disciplined underwriting expertise, lucrative margins and a high-yielding investment portfolio should continue to protect the group against potential industry headwinds and detariffication challenges. We initiate coverage on LPI with a BUY rating and a PT of RM21.40.

Maintaining Key Competitiveness, Leading Position in Fire Insurance

LPI Capital Bhd (“LPI”) is the top fire insurer in Malaysia. LPI’s entrenched position, strong in-house agency force and established relationship with bancassurance partners, independent brokers and global partners are its key competitive advantages, helping it to gain market share over the years and to withstand industry headwinds.

Impact of Detariffication (fire and Motor Insurance) to be Manageable

In our view, the impact of detariffication (of motor and fire insurance) is likely to be manageable for LPI as it has a much lower exposure to the higher claims ratio motor segment (i.e. lower underwriting profit), which represented 23% of its FY16 gross-written premium (vs. fire policies at 41%). We believe that a price war post-detariffication is highly unlikely due to: i) no free-floating of premiums, i.e. deviation of tariffs are still being controlled by BNM; ii) high motor claims ratio does not justify significant reduction in premium rates; and iii) risk-based capital framework does not justify an aggressive price competition.

Disciplined Underwriting, Superior Margins, Higher-than Peer ROE

LPI is run by a management team which has undertaken astute strategies to enable the general insurance player to generate superior underwriting margin of 31.4% vs. peers at 11% (for the past five years). This was through disciplined risk-underwriting, focusing on the relatively profitable fire segment and lower management expenses ratio. Having Public Bank as the main bancassurance partner and investment portfolio gains from Public Bank shares have also bode well for LPI’s higher-than peer ROE.

Initiate Coverage With a BUY Rating, Price Target at RM21.40

We initiate coverage of LPI with a BUY recommendation and a price target of RM21.40 (upside 14%) based on a premium 3.27x 2018E P/BV given its leadership, superior margins, strong bancassurance partner and superior FY17-19E ROE of 15%. Currently, LPI is trading at 3.1x 2017E P/BV against the industry average of 2.1x, while its FY17-19E dividend yields are at 4.0-4.3%, attractive vis-à-vis its peers at 2.8%.

Source: Affin Hwang Research - 18 May 2017