Period

1Q16/3M16

Actual vs. Expectations

Within expectations. The group reported 1Q16 net profit (NP) of RM65.4m which made up 24% of our and the consensus’, full-year estimates, respectively.

Dividends

As expected, no dividend was declared under the quarter reviewed.

Key Results Highlights

YoY, 1Q16 revenue increased by 10% driven by the higher gross earned premium (+11%) seen in the general insurance segment. Meanwhile, improvement in other income (+12%) which was mainly boosted by better commission income (+13%) also partly contributed to the growth.

EBIT improved by a wider quantum at 15.4% underpinned by lower claims incurred ratio of 43.1% (- 6.0ppts) despite higher commission expense ratio of 21.0% (+2.2ppts) and higher management expense ratio (+6.0ppts). As a result, the combined ratio dropped to 69.0% (-3.0ppts).

ROE improved to by 180bps to 15.8%.

QoQ, 1Q16 NP declined by 36% on a retracement of net earned premiums (-22%) coupled with the high earnings base in 4Q15, which was boosted by the realised capital gains of RM36.9m from PBBANK shares sales.

Looking at the key ratios, claims incurred ratio and combined ratio were higher with both dragged by lower net earned premiums. Meanwhile, retention ratio was lower at 53.6% (-7.5ppts).

Outlook

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

Furthermore, with the gradual liberalisation (which have recently witnessed the introduction of a road map for a phased liberalisation of motor and fire tariffs), stiffer competition is likely to be seen with more new products (more competitive rates) to be offered by insurers. We believe this could lead to further margin compression to the insurers.

Touching base on the phased liberalisation of motor and fire tariffs, management foresees that the earnings impact will not be significant as its Lonpac’s motor business only contributes c.25% of its total portfolio.

Change to Forecasts

We leave our FY16E earnings unchanged for now. Meanwhile, we have introduced our FY17E earnings.

Rating

Maintain UNDERPERFORM

Net earned premiums could be capped moving forward in a subdued economy. Since 2013, net earned premiums growth has been in single digit and we believe the trend would extend in FY16.

As 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

Post-results, we raised our TP to RM14.20 from RM13.66 as we roll over our valuation base year from FY16 to FY17. This is based on an unchanged blended FY17E PER/PBV ratio of 17.0x/2.5x (both based on LPI’s average 5-year PE and PB).

Risks to Our Call

Higher premium underwritten, hence growth.

Lower-than-expected combined ratio.

Source: Kenanga Research - 8 Apr 2016