LPI Capital’s 1Q19 net profit was within our and consensus estimates although it only saw marginal growth in 1Q19 as net profit increased 4.2% yoy (though down 8.4% qoq due to seasonality). The bulk of underwriting profit for 1Q19 was underpinned primarily by the fire (68%), followed by the miscellaneous (15.1%) and motor (13.5%) segments. For the quarter, we saw higher claims incurred at the miscellaneous segment (largely medical), though the group’s net claims ratio continued to hold up at 47.4%. Reiterate BUY, price target unchanged at RM18.90 based on a 3.2x P/BV target on 2019E BVPS.

1Q19 net profit at RM77.2m, with gross earned premium growth +2.4% yoy

LPI Capital saw a 1Q19 net profit of RM77.2m (+4.2 yoy; -8.4% qoq) underpinned by gross earned premium growth of 2.4% yoy (fire +2.2% yoy; motor +9.4% yoy; marine/aviation/transportation -18% yoy; miscellaneous -16.3% yoy). Investment income for the period grew by 12% yoy and a further 81% qoq largely due to better interest and dividend income. These have also helped to mitigate the impact of higher net claims incurred in the quarter, which saw a spike especially in the medical (under miscellaneous insurance) segment. This was reflected in the relatively flat underwriting profit for 1Q19 of RM58m, while the group’s net claims ratio stood unchanged at 47.4% (fire: 13.6%; motor: 70.6%; marine/aviation/transportation 62.7%; miscellaneous 71.5%).

Fire Policy-underwriting Still the Key Driver to Underwriting Profit

The fire segment contributed 40.8% of 1Q19’s net earned premium (NEP), followed by the motor segment at 32.5%, miscellaneous at 24.4% and MAT at 2.3%. Fire segment accounted for about 68% of 1Q19 underwriting surplus.

Reiterate BUY, Price Target Maintained at RM18.90

We Reiterate Our BUY Recommendation and Maintain Our Price Target at RM18.90, based on a 3.2x 2019E P/BV target. We maintain our FY19-21E earnings forecasts, noting that profits may fluctuate from quarter to quarter due to seasonal trends. Our key assumptions: i) GWP growth at 3-5%; ii) net earned premium growth at 5-5.6%; iii) net claims ratio at 38-39%. Based on LPI’s track record, its core net profit has not seen a decline since 2001, hence we believe that with management’s expertise in this industry, profits may likely resume growth with management’s move to exercise more caution in motor riskunderwriting as well as to roll-out more comprehensive fire insurance products, amidst a more liberalized market. Downside risks: price competition, spike in claims, higher fraud cases.

Source: Affin Hwang Research - 16 Apr 2019