As expected, 4QFY20 was manageable for LPI despite the CMCO as claims eased which supported bottom-line. Overall FY20 saw moderation in gross earned premiums but this was offset by easing in claims. Moving forward, 2021 could still be challenging with risks of prolonged lockdowns and liberalisation of the insurance industry in 2H 2021. Our TP is lowered to RM15.10 but we reiterate OUTPERFORM given its attractive dividend yield of c.>5%.

Earnings in line, dividends exceeded. FY20 Core Net Profit (CNP) of RM337m made up 102%/104% of our/market estimates. With a 2nd interim dividend of 44.0 sen, total DPS declared came up to 72.0 sen (85% payout ratio) exceeding our expectation of 65.0 sen (FY19: 70.0 sen).

YoY, despite the pandemic-induced challenges, FY20 CNP saw a significant improvement (+4%) on the back of lower claims (-6%) as gross earned premiums (GEP) moderated (+2% vs. FY19: +6%). The two main GEP contributing segments; Fire (~41%) and Miscellaneous (~30%) saw contrasting fortunes (with Fire flattish and Miscellaneous growing 5%) and the Motor segment chalking 5.0% growth. Combined Ratio eased by 350bps to 67% as both Claims Incurred ratio and Commission ratio eased by 270bps and 70bps, respectively, offset by Management Expense remaining flattish at 20%. Other Income saw moderation (+3%) despite the 15% shortfall in investment income which was offset by capital gains of RM18m.

QoQ, we had expected 4QFY20 to be challenging but it turned out to be manageable as the economy remained largely open. CNP rebounded (+10%) to RM95m with GEP in tow (+8%) to RM405m. GEP saw improvements as the three main contributors continued to be resilient; Fire (rebounding +12%), Miscellaneous (+5%) and Motor (+3%). On a positive note, the partial lockdown saw Combined Ratio easing by 7.4ppt as Claims Incurred eased 5ppt, followed by Commission and Management Expenses ratio easing 70 and 140bps, respectively, further supporting the bottom-line.

Another challenging year. 2021 could be another challenging year for LPI given the continued risks of prolonged lockdowns coupled with liberalisation of Motor and Fire Tariffs in June. We believe 1HFY21 will still be robust as long as the economy remains open, abetted by lower claims incurred in a partial lockdown. We expect the Motor segment to remain robust at least for 1H 2021 given the extension of the vehicle sales tax exemption with the Miscellaneous and MAT segments supporting growth in tandem with the expected economic recovery.

Post results, our FY21E earnings are unchanged as we do not expect significant changes in macroeconomic factors. Additionally, we also introduced our FY22E numbers.

Maintain OUTPERFORM but TP lowered to RM15.10 (from RM15.35 - as we reduce our BVPS to support the large dividend payout) applying an unchanged FY21E 2.8x PBV valuation (implying a 0.5SD below its 5-year mean) as the insurance landscape remains challenging. We do not see lofty ROEs ahead (5-year mean at 18%) which are expected to maintain at c.16% with the incoming liberalisation of the insurance industry. Given its RM1.7b reserves, we believe LPI will continue to target an 85% payout ratio offering >5% dividend yield. At current price level, this could appeal to yield-seeking investors, even if the group lowers the payout to its 5-year average of c.76%.

Risks to our call include: (i) lower premium underwritten, (ii) higher- than-expected claims, (iii) higher-than-expected management expense ratio, and (iv) further rounds of MCO.

Source: Kenanga Research - 4 Feb 2021