We came away from a meeting feeling more POSITIVE on LPI’s prospect, which will be anchored by the resilient takeup in its Fire insurance segment and Engineering insurance that falls under Miscellaneous segment. Margins should also be sustained by its strategic portfolio exposure, further augmented by better operational efficiency on system investments. While we maintain our FY17E earnings, we increased our FY18E NP by +5%. Maintain MARKET PERFORM with a higher TP of RM18.10.

Positioned well despite stagnating Motor insurance segment. Since the phased liberalisation of Motor and Fire insurance (First phase started w.e.f. 1 July 2016; Second phase started w.e.f. 1 July 2017), more varieties of motor insurance with add-on coverage (with more rating factors, including i.e. driver experience, occupation, claims frequency, beyond usage of cars, cubic centimeters in a car and sum insured) are being introduced by market players. While our concerns are on the undercutting of premium pricing that could induce greater competition, management noted that there are, in fact, not much of premiums revision seen thus far among the new motor insurance products, thanks to the risk-based capital framework in place as well as the thin margins that motor insurance carries. Another plus points that are sheltering the group to the stagnating motor insurance is its limited portfolio exposure which contributes 21% of the group’s 1H17 gross written premiums (GWP), vis- à-vis other big players that have >50% exposure as well as the niche focus in the comprehensive and private vehicles which give better experience ratings.

Strategic move to buck the weak industry trend. Note that while the 1Q17 insurance premium growth is in negative territory, LPI managed to claw a 3% growth thanks to its strategic portfolio exposure. For the main driver - fire insurance (which contributes 43% to the GWP in 1H17), while we observed there are not much changes in the market given that the premium rates for existing fire products will continue to be regulated with gradual adjustment until 2019, we were reassured by the group’s strategy to focus from the perspective of top-line (by enhancing its distribution channels, which is one of the biggest success factor in growing volume) and bottom-line (improving claim incurred ratio by strategic segmentation in Small, Medium and Large size fire portfolios thus better spread of risks, as well as better operational efficiency through system enhancement, which collectively ensure low combined ratio).

Miscellaneous segment- the rising star. While the group’s Marine, Aviation & Transit segments (contributes 7% of GWP; -21% YTD) continued to see softness due to the headwinds in O&G segment, Miscellaneous segment (consisting of lion’s share Engineering insurance and Medical, Personal Accident, Liability insurance which collectively contributes 29% of GWP) is seeing resilient growth (of +5% YTD). It is notable that for the segment, the group has gained better traction thanks to the upcoming infrastructure and construction jobs from Government, i.e. MRT 2, LRT 3, East Coast Railing, Borneo Highway and Rapid, which should anchor low teens growth for the group.

Maintain MARKET PERFORM with a higher TP of RM18.10 from RM17.70. Post-meeting, 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 FY17E earnings, we increase our FY18E CNP by +5% to account for higher GWP growth of 5.8% from -1% previously. With an unchanged blended FY18E PER/PBV ratio of 19.4x/2.8x (both based on LPI’s +1SD above its 3-year PER and PBV), our TP now is at RM18.10. Maintain MARKET PERFORM. Risks to our call include: (i) lower premium underwritten, hence growth, and (ii) higher-than-expected combined ratio.

Source: Kenanga Research - 3 Aug 2017