9M18 CNP came in line, so was the absence of DPS. Though competition intensified post the detariffication of Motor and Fire insurance with compressing profit margins being the norm across the industry, the group is gaining a bigger market share to compensate in terms of absolute amount. We made no changes to our earnings estimates. Maintain MARKET PERFORM with an unchanged TP of RM16.30.

Within expectations. The group reported 3Q18 core net profit (NP) of RM91.8m (+40% QoQ; -1% YoY), bringing 9M18 CNP to RM230.0m (+1%) which made up 71%/73% of our/consensus’ full-year estimates. Absence of DPS was expected. We are expecting the group to declare a total net DPS of 60.0 sen (representing 74% pay-out), similar as last year.

YoY, 9M18 revenue increased by 2% driven by the higher gross earned premium (+1%) in the general insurance segment. Note that decent growth in lion’s share contributor- Fire insurance (+3%) as well as Miscellaneous insurance (+2%) made up for the shortfall in weaker Marine, Aviation & Transit segment (-10%). At the operating profit level, however, EBIT stayed flat owing to the higher combined ratio, predominantly driven by higher claims incurred ratio (CIR) of 41.6% (vs. 40.0%) despite the stable management expense ratio (-0.1ppts). Note that this was mainly caused by the higher motor claims in 1Q18 (CIR: 47.1%) alongside the absence of “incurred but not reported” claims released from Malaysia Motor Insurance Pool; hence, poorer claims experience. Notably, CIR in 2Q and 3Q18 had normalised back to the high-30% and low-40% levels.

On QoQ basis, seasonally stronger performance was observed across the board for operating revenue (+11%) or other income. With the much lower combined ratio of 65.7% (-3.7ppts) and lower effective tax rate (ETR) of 21% (vs. 24%), net profit (NP) surged 40%.

Striving against the backdrop of stiffer competition. Though lower margin is observed with its combined ratio inching up, the group’s top line/NEP managed to cling on to an organic growth of 2%/9%; which we believe is in-line with the group’s strategy to compensate for the lower margin with a bigger market share. Note that this is all against the backdrop of stiffer competition post-implementation of Phase 2 framework (where motor insurance for comprehensive cover and third- party fire and theft will be detariffed) as well as the lacklustre property market. Claims incurred ratio remained at the low-40% level thanks to its limited portfolio exposure in motor insurance which only contributes 21% to its 9M18 GWP, vis-à-vis other big players that have >50% exposure as well as the niche focus in the comprehensive and private car segments which give better experience ratings. We are keeping FY18E/FY19E NEP growth assumptions of 6%/10% with our CIR assumptions remaining unchanged at 40%/41%.

Maintain MARKET PERFORM with an unchanged TP of RM16.30. We made no changes to our earnings estimates with TP maintained at RM16.30. This is still based on an unchanged blended FY19E PER/PBV ratio of 19.5x/2.9x (both based on LPI’s +1SD above its 3-year PER and PBV). Maintain MARKET PERFORM.

Risks to our call include: (i) lower premium underwritten, hence growth, and (ii) higher-than-expected combined ratio.

Source: Kenanga Research - 11 Oct 2018