LPI Capital’s 9M19 net profit (RM235.7m, +2.4% yoy) came in below expectations, accounting for only 68% of our 2019E net profit of RM344.9m. Though LPI’s net profit improved by 24% qoq (due to higher investment gains and improved underwriting profits), we are of the view that the recovery is not significant enough to meet our full year expectation due to the persistently high claims, commission and management expenses. Comparatively, 9M19 combined ratio rose to 72.5% against 69.3% in 9M18 and had resulted in a marginal decline of 2.6% yoy in 9M19 underwriting profit. We are revising down our 2019E- 22E net profit by 6.9-9.0% as we raise the group claims ratio to 43-44%. Downgrade to HOLD (from Buy), with a revised TP of RM15.90.

High Expenses and Claims Eroded 9M19 Underwriting Profit

LPI Capital reported a 9M19 net profit of RM235.7m (+2.4 yoy) while on a qoq basis, net profit recovered and rose by 24.1% (aided by higher investment gains and improved underwriting profits). Overall, topline growth, as implied by a healthy 9M19 net earned premium (+10.2% yoy) was not sufficient to offset the growth in claims and expenses (in total, up 16% yoy) and this had resulted in a 2.6% yoy decline in underwriting profit. For the period, LPI saw higher net claims incurred (9M19 +20% yoy), higher net commission expenses (+26.5% yoy) while management expenses were up 5.5% yoy. Segments which saw deterioration in underwriting surplus for 9M19 are the marine, aviation and transport (MAT) and the miscellaneous segment (accident and medical classes), driving up the group’s 9M19 net claims ratio to 45.2% (9M18: 41.6%).

Revising 2019E-22E net profits by -6.9% to -9% on higher claims forecasts

We are revising down our 2019E-22E net profits by 6.9%/9.0%/9.0% as we factor in a higher net claims ratio assumption of 43-44% from 38-39%, driven by higher claims from the MAT and miscellaneous segments.

Downgrade to HOLD From Buy, With a Revised PT of RM15.90

We downgrade our rating on LPI to HOLD, and lower our TP from RM18.90 to RM15.90, based on a revised P/BV of 3.09x (from 3.14x) on 2020E BVPS of RM5.15 subsequent to the negative earnings revisions. Our key assumptions: i) GWP growth at 3-5%; and ii) combined ratio at ~70%. Despite a weaker earnings outlook, LPI continues to stand out in the industry with a gross written premium (GWP) growth of 3.6% yoy vis-à-vis industry decline of 1.7% yoy for the 1H19 (no industry data available for 9M19), while leveraging on its strong distribution channel and global partnerships. Downside/upside risks: rise/decline in claims ratios; higher frauds/thefts and weaker economic outlook

Source: Affin Hwang Research - 16 Oct 2019