LPI Capital’s 1H19 net profit (RM148m, +7% yoy) was in-line with expectations alhough accounting for 43% of our 2019E forecast of RM344.9m, as we expect a stronger second half. The bulk of underwriting profit for 1H19 (+1.1% yoy) was underpinned primarily by the fire (68.3%), followed by the miscellaneous (15.3%) and motor (12.3%) segments. For 2Q19, we saw higher claims incurred at the miscellaneous segment (accident and medical classes), though the group’s net claims ratio stood at 44.9% (2Q19) and 46.1% (1H19). Reiterate BUY, PT unchanged at RM18.90 (based on a 2020E 3.14x P/BV target multiple). LPI outperformed peers with a gross written premium growth of 5.1% yoy in 2Q19 though the industry declined by 7.6% (1Q19).

1H19 Net Profit at RM147.9m; Net Earned Premium Rose +10.4% Yoy

LPI Capital reported a 1H19 net profit of RM147.9m (+7.0 yoy). While 2Q19 net profit of RM70.8m was down 8.3% qoq, earnings was up 7.6% yoy. Results for 1H19 was driven by net earned premium growth of 10.4% yoy (fire +5.4% yoy; motor +14.7% yoy; marine/aviation/transportation +6.5 yoy; miscellaneous +14.3% yoy). Investment income for 1H19 grew by 17.4% yoy, though on a qoq basis, 2Q19 saw a decline of 39% arising from weak market performances. During the period under review, LPI saw higher net claims incurred (1H19 +16% yoy), and higher net commission expense (+40% yoy), of which were also being reflected as higher ratios of 46.1% in 1H19 for net claims (1H18: 44%) and 6.2% in 1H19 for net commission (1H18: 4.9%).

Fire Policy-underwriting Still the Key Driver to Underwriting Profit

The fire segment contributed 41% of 1H19’s net earned premium (NEP), followed by the motor segment at 32.1%, miscellaneous at 24.7% and MAT at 2.1%. Fire segment accounted for about 68.3% of 1H19 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 3.14x 2020E P/BV target. 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. Accordingly, we understand that though the entire general insurance industry’s GWP declined by 7.6% yoy in 1Q19, LPI on the other hand saw a growth of 5.1% yoy to RM827.5m (for 1H19) due to its strong distribution channel and global partnership. Downside risks: price competition, spike in claims, higher fraud cases.

Source: Affin Hwang Research - 16 Jul 2019