FY22 net profit of RM276.6m (-20%) and total dividends of 60.0 sen are above our expectations as earnings were supported by better policy retention and investment gains. LPI is likely to see greater competitive forces in its chief fire insurance and motor segments as further detariffication kicks in. However, there could be support as peakish claims ease. Better MFRS 17 reporting could garner favour against its peers. Maintain OP with a higher TP of RM14.50 (from RM14.10) as we roll over our valuation base year.

FY22 was stronger than expected, with a net profit of RM276.6m beating our forecast and consensus estimates by 10% and 5%, respectively. The positive deviation was due to higher-than-projected retention ratios alongside more supportive investment income thanks to 4QCY22’s stronger showing from GE15-inspired stock trading. A second interim dividend of 35.0 sen was declared for a full-year payment of 60.0 sen (c.85% payout) which is deemed better than our anticipated 55.0 sen in lieu of the abovementioned earnings outperformance.

YoY, although FY22 gross written premiums rose by 4%, higher general provisions brought net earned premiums (NEP) down by 2%. Miscellaneous segments contributed mostly to the decline in NEP (-5%) while key Fire (-1%) and Motor (-3%) segments slightly moderated. Retention ratio picked up in 4QFY22 to a higher full-year closing at 63.5% (+0.7ppt) as risk tolerance against macro uncertainties could be easing. Meanwhile, claims ratio surged to 44.0% (+7.5ppt) as returning economic activity brought about a normalisation of instances. Owing to this, combined ratio came in at 71.9% (+8.9 ppt) and dragged FY22 net profit to RM276.6m (-20%).

Pilling competition met by easing fundamentals. In the near term, it is likely that LPI’s key fire insurance segment could see greater competition spurred by detariffication measures introduced by Bank Negara in Oct 2022. The motor insurance space would also see further tariff adjustments in 2HCY23. That said, there is some relief with regards to claims ratios as incidences are expected to be less aggressive from normalising activities. In addition, the group saw higher reinsurance rates no thanks to severe strains to its coverage following the Dec 2021 floods situation. As more controls are expected to be implemented here going forward, so should too the spill-over to LPI.

Forecasts. Post results, we raise our FY23F net profit by 6% as we input better policy retention rates, closer towards historical levels of 35% (from 40% previously inputted). Meanwhile, we introduce our FY24F numbers. Note that our current forecasts and presentation do not account for changes brought by the newly implemented MFRS 17 which could trigger higher earnings recognition for LPI as it would be expected to tone down previously more conservative provisioning measures. We await further clarity and guidance from the group before making the necessary adjustments to our models.

Maintain OUTPERFORM with a higher TP of RM14.50 (from RM14.10) as we roll over our valuation base year to FY24 against an unchanged 2.5x 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 that 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 - 8 Feb 2023