We maintain our TP of RM14.10 and OP call. Post meeting, we gathered that the insurance space will be challenged by greater price competition from new tariff liberalisation phases. Meanwhile, stabilisation of claims and reinsurance ratio may ease earnings pressures. The newly implemented MFRS 17 should translate to better earnings presentation, as prior conservative provisional methods should moderate.

Key takeaways from our recent meeting with the group are as follows:

- Detariffication to mount pressure. Recall that in Oct 2022, fire tariffs were further reduced by 15% as part of Bank Negara’s efforts to liberalise the industry. As the segment makes up 40% of LPI’s gross premiums and c.60-70% of underwriting surplus before management expense, heightened competition here could be sensitive to group earnings. Against this, the group opines that the expansion of its agency force could sustain its leading presence in the market. Notwithstanding this, the group continues to benefit from referrals from Public Bank, albeit we believe housing loans will likely see slower growth on higher interest rates at present.

- Motor insurance also not spared. In 2HCY23, the motor segment could see further detariffication by 20%. On the flipside, the insurance class is also one of the costlier segments in terms of claims ratio with inflationary pressures also raising claim values. The group opines that it opt to maintain its presence but may seek to focus on more profitable segments, given its lower margins.

- Claims and reinsurance may come off. Prior quarters demonstrated higher claims ratio (c.45%) against the Covid periods (c.35%). The group believes that recent highs could be due to more aggressive return of movements, which could due to normalise in the near future. Meanwhile, the group saw reinsurance rates spike on the back of Dec 2021 floods which have put strains on reinsurance coverage in 2022. We believe that as most risk factors are identified and coverages confined, it is possible that reinsurance levels could revert to lower levels, though the group believes it could be unlikely to see historical levels (<35%) in the near term.

- MFRS 17 may support earnings presentation. Effective 1st Jan 2023 reporting periods, the new accounting standard more evenly distributes underwriting revenue recognition over a policy’s term, which would undermine accounts that report lumpier revenues during their earlier periods. In addition to the establishment of a new “contractual service margin” liability, revenues and retained earnings are expected to decline. That said, LPI may experience a reversed trend as prior practices implied higher provisioning and less revenue reported in earlier periods. Hence, complying to MFRS 17 may in effect bolster recognition on an overall basis.

Forecasts. Post meeting, we leave our earnings assumptions unchanged. Primarily, we believe our retention ratio is in line with the group’s expectations while conservatively booking higher claims going forward.

Maintain OUTPERFORM and TP of RM14.10. Our TP is based on an unchanged 2.5x FY23F PBV, based on a 25% premium against the historical forward PBV of industry peers. At current price levels, we believe there are buying opportunities as LPI’s premium remains justified based on its better dividend prospects and earnings, notwithstanding support from its affiliation with Public Bank. While there is no guided impact with regards to MFRS 17 to group earnings, investors may be more inclined with LPI as opposed to peers whom are expecting earnings erosion. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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

Source: Kenanga Research - 9 Jan 2023