1Q17 CNP came in within expectations. Absence of DPS was expected as well. Although the detariffication of Motor and Fire insurance could trigger greater intensity of competition among the insurers, we are comforted by the group’s strategies in embracing the new trend. As our assumptions are still intact, we made no changes to our FY17E/FY18E NPs. Maintain MARKET PERFORM with an unchanged TP of RM17.30.

Within expectations. The group reported 1Q17 core net profit (NP) of RM70.6m (-13% QoQ; +8% YoY), which made up 23% both of our/consensus’ full-year estimate, respectively. Absence of DPS was expected.

YoY, 1QF17 revenue increased by 8% driven by the higher gross earned premium (+10%) seen in the general insurance segment. Decent growth in lion’s share contributor - Fire insurance (+10%) as well as Miscellaneous insurance (+12%) made up for the shortfall in Motor (-2%) as well as Marine, Aviation and Transit (-29%) segments. Note that the drastic drop in Marine, Aviation and Transit insurance segment was dragged by the slower Oil & Gas industry. At the operating profit level, EBIT improved by a similar quantum of +8% underpinned by lower claims incurred ratio of 39.8% (-3.3ppts) despite an up-tick in net commission (+3.7%). Coupled with lower management expense, the combined ratio improved to 68.1% (-0.9 ppts). Meanwhile, core annualised ROE improved to 16.7% (vis-à-vis 1QFY16’s 15.8%).

Meanwhile on QoQ basis; 1Q17 total income decreased by 5% dragged mainly by seasonally lower net earned premium (-15%). With higher claims incurred and management expenses ratios (both computation with the lower net earned premium as the denominator for the respective ratios), combined ratio spiked up by 10.6ppts to 68.1%, leading to lower CNP of RM70.6m (-13%).

Well prepared for the liberalisation of Motor and Fire insurance tariffs. Note that Phase 2 of the framework on phased liberalisation of Motor and Fire Tariffs will commence on 1st July 2017 provides for detarrification of the motor business. While general perception is that the detariffication could trigger greater intensity of competition among the insurers, thus leading to margin compression, we were comforted by management’s strategy that will be supported by better actuarial team, investment in new systems as well as its strategic portfolio exposure, which has relatively low exposure to the Motor segment compared to other insurers. On top of that, the group has also been appointed the main insurer for MRT Line 2; which marked the second insurance business from MRT. Although the GWP from MRT Line 2 is <5% as of its group’s FY17 GWP (with more reinsurers), we see this milestone as a recognition from a leading construction player which boosts its reputation.

Maintain MARKET PERFORM with an unchanged TP of RM17.30. As our assumptions are still intact, we made no changes to our FY17E/FY18E NPs. Hence, we maintain our TP of RM17.30. This is based on a blended FY17E PER/PBV ratio of 19.4x/2.8x (both based on LPI’s +1SD above its 3-year PER and PBV). Risks to our call include: (i) lower premium underwritten, hence growth, and (ii) higher-than-expected combined ratio.

Source: Kenanga Research - 11 Apr 2017