We came away from a meeting with management feeling NEUTRAL on LPI’s near-term prospects. The group aims to capture a larger share of the fire insurance market. However, this may be mitigated by pressures from its 2019 review and detariffication of the motor segment. Future strategies could include increasing its agency network and enhancing product offerings across segments. Maintain MARKET PERFORM and TP of RM16.30.

Fire insurance holds ground. Fire insurance continues to be the group’s leading contributor in gross premiums (42.9% of 9M18 revenue, +13% YoY) in addition to having the lowest net claims incurred ratio (9M18: 12.9%) across all segments. While the improving results could be pegged to Public Bank’s mortgage growth rates during the year, management also attributed the better performances from its proficient agency distribution network. With that, management aims to expand their agent base by 10% per year to cater to the growing market needs. At present, it is estimated that the group possesses a 17% share of the local fire insurance’s market.

Challenges at the motor insurance front. Despite better gross written premiums in the motor segment (21.1% of 9M18 revenue, +10% YoY), the group saw a higher claims ratio of 74.9% (+4.0ppt) in 9M18. The thinning margin is owing to the industry’s detariffication which saw insurers offering the same coverages but at lower premiums. Still, we take comfort that in spite of the above, the growing segment topline is stemmed from higher transaction volumes, which indicate the group’s strength in the segment. Note that the majority of the group’s motor insurance profile caters to private automobile owners (c.60% of segment premium).

On the miscellaneous insurances segment, it is suspected that its slowing performance is due to a weakness in construction and engineering works during the year which could further drag into the near-term. To minimise exposure in such businesses, the group considers increasing their involvement into other insurance classes (i.e. medical, liabilities, workmen compensation). While these sub-segments could potentially be high-growth areas for the group to tap into, their existing contributions may not be sizeable as a whole and may still require heavy initiatives to make a meaningful impact in the long term.

Bracing for the uphill. The coming review of fire class insurances in 2019 could spell greater competition for the group which also puts its high-margin operating landscape under threat. Furthermore, motor class insurances market is anticipated to experience flattish growth inline with the soft domestic automobile market. As such, we concur with the management’s strategies in widening their base through a greater agency presence could ensure that the group’s revenue stream is not undermined by offering more affordable products in the future. In addition the group’s leading position could enable them to provide more comprehensive and value-added packages to hold its market share and profitability.

Maintain MARKET PERFORM with an unchanged TP of RM16.30.

Post meeting, we make no changes to our earnings assumptions for FY18E/FY19E as we believe the above has been sufficiently accounted for. Our ascribed target price is 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).

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

Source: Kenanga Research - 24 Oct 2018