LPI Capital’s 2019 net profit of RM322.4m (+2.6% yoy) came in within our expectations and consensus. The industry has been challenging for LPI due to price competition while weak demand has capped its gross written premium growth at 4% yoy in 2019. Due to challenges on operating expenses as well, LPI recorded a higher combined ratio of 69.8% for 2019 (from 67.3% in 2018). The overall claims ratio has not shown improvement, but crept up from 40.9% to 43.9% yoy arising from rising medical inflation and frequency of claims. As we continue to stay cautious on LPI’s outlook (with expectations of slower auto sales growth and more cautious business sentiment), we make some minor adjustments to our 2020E-21E net profit by 4-7% as we project slower investment income growth. Meanwhile, the group has proposed a 2nd interim dividend of 43 sen, bringing full year DPS to 70 sen (2018: 68 sen). Maintain HOLD, with a revised TP of RM15.70.

High Expenses and Claims Eroded 2019 Underwriting Profit

LPI Capital reported a 2019 net profit of RM322.4m (+2.6 yoy) while on a qoq basis, earnings was relatively flat. Overall, topline growth, as implied by a healthy 2019 net earned premium (+8.7% yoy) was not sufficient to offset the growth in claims and expenses (in total, up 16.7% yoy) and this had resulted in flat underwriting profit. For 2019, LPI saw net claims incurred up 16.7% yoy, higher net commission expenses (up +16.8% yoy) while management expenses growth was slower at 3.0% yoy. Deterioration in the group’s net claims ratio from 40.9% (2018) to 43.9% (2019) was largely attributable to the the miscellaneous segment (comprising mainly accident and medical classes).

Revising 2020E-21E net profits by -4% to -7% on lower investment income

We are revising down our 2020E-21E net profits by 4.0-7.0% as we factor lower investment income.

Maintain HOLD With a Revised PT of RM15.70

We maintain our HOLD rating on LPI but with a slightly lower PT of RM15.70, based on a revised P/BV of 3.07x on 2020E BVPS of RM5.12 subsequent to our earnings revisions. Our key assumptions: i) GWP growth at 3-5%; ii) net claims ratio at 43-44% and iii) 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 5.8% yoy vis-à-vis industry decline of 1.0% yoy for the 9M19 (no industry data available yet for 12M19), 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 - 4 Feb 2020