Period

4Q15/FY15

Actual vs. Expectations

FY15 net profit (NP) came in at RM321.0m due to strong growth from net earned premiums and gains from sale of PBBANK shares. Stripping out the realised gain, core net profit came in at RM244.8m, accounting for 105%/101% of our/market estimates.

Dividends

A second interim dividend of 50.0 sen/share was declared firming its full-year dividend declared to 70.0 sen per share. (FY2014: 75.0 sen/share).

Key Results Highlights

FY15 vs. FY14, YoY

FY15 NP grew 13.4% due to strong growth from net earned premiums of 8.1% (12M14: +5.3%) and other income by 13.7% (12M14: +42.9%).

The strong growth from other income was primary due to the realised gain from sale of PBBANK shares of RM76.2m (+10.9%). Other contributing factor was strong performances of investment income at +11.7% (12M14:+7.6%) and commission income at +17.1% (12M14: +0.8%).

NP performance was also boosted by: (i) lower claims incurred ratio by 3.0ppts) to 41%, and (ii) lower commission ratio 1.0ppts to 4.8% despite higher management expenses up by 1.7ppts to 21.7%. Consequently, the combined ratio decreased by 2.3ppts to 67.5%.

ROE improved to by 70bps to 14.4% (excluding the realised gain). 4Q15 vs. 3Q15, QoQ

QoQ, 4Q15 NP improved by 34.8% due to net earned premiums growing by 6.3% and realised gains of RM36.9m.

On the downside, net commission ratio gained 10bps and management expenses ratio rose 110bps, but claims incurred ratio fell by 3.2ppts.

Outlook

The challenging economy is expected to dampen the growth of insurance industry in 2016.

For FY16, we revised our assumptions with: (i) NEP growth of +6.6% (from +3.8%), (ii) Claims incurred ratio at 41.0% (from 44%), (iii) Management expenses at 21.5% (from 20.4%), and Commission income ratio at 4.7% (from 5.2%).

Change to Forecasts

Based on the adjustments, we revised upwards our FY16 earnings estimate by 10.1% (based on no realised gains for both FY15/FY16). The higher revision is based on our prudent assumptions as mentioned above.

We expect management to maintain dividend at 70.0 sen per share for FY16.

Rating

Downgrade to UNDER PERFORM

Core Earnings are challenging moving forward in this challenging environment. Since 2013, earnings have been in single digits and we believed it will continue to do so in FY16.

Given that LPI had consistently strives to boost earnings by capital gains, we do not discount further disposal of PBBANK shares to enhance its dividends for FY16.

Valuation

We revised upwards our Target price to RM13.66 (from RM13.35), based on a blended FY16E price-earning (PE)/ price-book (PB) ratio of 2.5/17.0x (from 2.4/19.1x previously). Both PE and PB are based on LPI’s average 5-year PE and PB.

Risks to Our Call

Lower premium underwritten, hence growth.

Higher-than-expected combined ratio.

Source: Kenanga Research - 28 Jan 2016