We reverse our previous conservative view on LPI following a meeting with management yesterday as we now feel more reassured by the group’s strategies in sailing through industry headwinds. While no changes were made to our FY16E/FY17E earnings as our drivers assumptions are still intact, we increase our blended FY17E PER/PBV ratio to 19.0x/2.7x (from 17.0x/2.5x) to reflect our positive conviction on the stock. TP raised to RM16.16 from RM14.65. Upgrade to MARKET PERFORM.

Comfortably welcoming the liberalisation of Motor and Fire insurance tariffs. Recall that the first phase of detariffication has started w.e.f. 1 July 2016; which paves the way for better pricing flexibility in new products offering. While general perception is that detariffication could trigger greater intensity of competition among the insurers, thus leading to margin compression, we feel more reassured by management’s strategy in managing such risk. Note that besides the stronger actuarial team which the group has newly formed, which will be the enabler for best pricing strategies, we also lauded management’s moves in investing in more new systems, which improve the group’s operational efficiency, and at the same time enable the group to roll out more services such as claims through internet portal. On top of that, management also noted that its strategic portfolio exposure, which has relatively low exposure to the Motor segment compared to other insurers (c.21% of Gross Written Premiums - which also has the highest combined ratio), limits its exposure risks to the stiff price war. Meanwhile, from the macro view, management highlighted that the pricing of insurance products, are still obliged to follow the risk-based capital framework issued by BNM. Therefore, preventing the aftermath of uncontrolled detariffication that happened to neighbouring countries.

Bucking the weak industry trend. While industry growth is expected to grow modestly at 2.5-3.5% for 2016 as forecasted by the PIAM, the group is targeting to register 5% growth in terms of Gross Written Premium (GWP); a forecast which is also shared by us (at 4.7% for FY16), on the back of its Fire Insurance segment. Recall that the group has registered 4% GWP growth in 1H16 vis-à-vis a modest 3% growth registered by industry. Notably, the group has also been appointed the main insurer for MRT Line 2; which marked the second insurance business from MRT. Although we gather that the GWP from MRT Line 2 is <5% as of its group’s FY16 GWP (with more reinsurers), we see this milestone as a recognition from a leading construction player which boosts its reputation.

Other key notes. For its Capital Adequacy Ratio (CAR), management noted that the group and its 100%-owned Lonpac Insurance’s CAR are at comfortable levels of >200% and >300% to date. Note that these buffers are much higher than the minimum CAR requirement of 130% mandated by BNM. Meanwhile touching base on its PBB shares, management noted that the main reasons for the disposal are to reduce its concentration risk charges by the authority as well as to realise its tax-exempt capital gains (given current high share prices).

Upgrade to MARKET PERFORM with a higher TP of RM16.16. Postmeeting, we are turning more sanguine on the group’s prospect given its solid financials as well as the strategic measures to counterbalance the macro headwinds. While we made no changes to our FY16EFY17E earnings, we increase our blended FY16E PER/PBV ratio to 19.0x/2.7x (which is based on LPI’s +1SD above its 5-year PER and PBV) to reflect our positive conviction on the stock. Risks to our call include: (i) lower premium underwritten, hence growth, (ii) higher-thanexpected combined ratio.

Source: Kenanga Research - 7 Sep 2016