Post-MFRS 17, LPI’s 1QFY23 net profit of RM73.8m is deemed to have met estimate, as we gather that the transitional impact from the new accounting standard could be more muted as compared to its peers. The group will still be a heavy contender in the fire insurance space which could see higher pricing pressures, but we are undeterred given its strong backing by a leading financial institution. Maintain OP with a higher TP of RM14.70 (from RM14.50) post MFRS 17 adjustments to our model forecasts.

1QFY23 within expectations as compared to previous accounting standards. 1QFY23 net profit of RM73.8m made up 22% of our full-year forecast and 24% of consensus full-year estimate based on MFRS 4 accounting standards.

Effective 1 Jan 2023, the group has applied the new MFRS 17-Insurance Contracts standard to replace MFRS 4 which uniformly distributes revenue recognition of insurance and reinsurance contracts but also changes accounting presentations, such as the removal of “net earned premiums” for “insurance service result”. Comparing these standards, we note that a re-stated 1QFY22 saw the following changes: (i) net profit higher by 5.5%, and (ii) ROE enhanced by 0.7ppt.

YoY, 1QFY23 insurance service revenue rose 11% led by greater contributions from its key fire segment (+23%). However, due to greater claims from the same segment, net claims incurred ratio rose to 51.8% (+7.1ppts) and overall insurance service results were lower by 8%. On the flipside, net financial result surged 66% mostly thanks to fair value gains. This lifted pre-tax profit by 12% despite 1QFY23’s combined ratio creeping up to 81.4% (+4.4ppts). All in, 1QFY23 net profit came in at RM73.8m (+14%).

Outlook. The group is likely to experience mounting pressures from the ongoing detariffication of the fire segment which is expected to stimulate more competitive market pricing. The motor insurance segment would follow suit in 2HCY23, albeit likely not as intense as the fire class due to its smaller proportion. Claims ratio could see some tapering off from the normalisation of overall activities but reinsurance premiums may continue to increase as flooding occurrences grow more frequent, spurring persistent revaluation of its reinsurance coverage.

Forecasts. Post results, we transition our model inputs to reflect the new MFRS 17 requirements, resulting in a -6%/-1% adjustment to our FY23F/FY24F earnings. Meanwhile, due to the higher allocation of reserves in equity, our BVPS saw a marginal 1% in both years.

Maintain OUTPERFORM with a higher TP of RM14.70 (from RM14.50). The higher TP is derived from our new model inputs, particularly by the slightly enlarged BVPS. We had applied an unchanged 2.5x FY24F BVPS, based on a 25% premium against the historical forward PBV of industry peers. We believe investors may still shy away from the insurance space until the material impact of MFRS 17 becomes more visible. However, we see this as an opportunity to accumulate LPI given that its premium valuation remains justified based on its better dividend prospects and earnings, notwithstanding support from its affiliation with Public Bank. 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 - 25 Apr 2023