Period

3Q15/9M15

Actual vs. Expectations

9M15 net profit (NP) came in at RM218.8m due to strong growth from net earned premiums and other income. Stripping out the realised gain from the PBBANK share sales core net profit came at RM185.5m, accounting for 80% of ours/ market estimates.

Dividends

No dividend declared as dividends are usually declared in the 2Q and 4Q.

Key Results Highlights

9M15 vs. 9M14, YoY

9M15 NP grew 32% due to strong growth from net earned premiums at 6.5% (9M14: +5.7%) and other income at 40.3% (9M14: +6.8%).

The strong growth from other income was primary due to the realised gain from sale of PBBANK share sales of RM33.4m. Other contributing factor was strong performance of investment income at +10.3% (9M14:+6.9%) and commission income at +16.1% (9M14: +2.9%).

However NP expansion was capped by higher management expenses ratio (ratio: +1.9ppts), despite lower net commission ratio (ratio: -1.4ppts) and lower claims incurred ratio (ratio: -1.5ppts). Consequently, the combined ratio decreased only by 1ppts to 69.4%. 3Q15 vs. 2Q15, QoQ

QoQ, 3Q15 fell by 11% due to a 31% fall in other income (with the absence of any realised gains) albeit net earned premiums growing by 5.7%.

On the upside, claims incurred ratio fell by 5.26ppts; management expenses ratio dropped by 3.5ppts but net commission ratio jumped 70bpts.

Outlook

The challenging economy will dampen the growth of insurance industry moving forward. Industry growth is expected to grow between 3-4% for 2015 as forecasted by the General Insurance Association of Malaysia.

Change to Forecasts

No changes have been made to our earnings estimates.

We maintain our earnings forecasts for FY15, due to resilient performance of the group up to 9M15.

For FY16E, we maintained our earnings as we forecast net earned premium growth of 3.8% (in view of the uncertain economic environment) vs 7.6% for FY15.

Rating

Downgrade to UNDERPERFORM

While LPI is still proving resilient amidst a challenging economic environment, growth is expected to be subdued moving forward.

Valuation

We reduce our Target price to RM13.35, based on a blended FY16E price-book (PB)/ price-earning (PE) ratio of 2.4/19.1x (previously it was FY16E PB/PE ratio of 2.5/21.2x. The lower valuation is reflective of the lower ROE going forward.

Risks

Lower premium underwritten, hence growth.

Higher-than-expected combined ratio.

Source: Kenanga Research - 9 Oct 2015