LPI’s 1HFY23 results met expectations. Despite rising competition stemming from the ongoing detariffication, we believe LPI will be able to defend its market share, backed by a leading financial institution and brand equity. We fine-tune down our FY23-24F earnings by 4% and 1%, respectively, but maintain our TP of RM14.70 and OUTPERFORM call.

1HFY23 within expectations. LPI’s 1HFY23 net profit made up only 43% and 46% of our full-year forecast and the full-year estimate, respectively. However, we consider the results within expectations as typically higher claims are booked in during 1H which historically made up c.45% of full-year earnings.

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 2QFY22’s net profit and ROE have insignificant differences.

YoY, its 1HFY23 insurance service revenue grew by 12% mainly thanks to continued traction in its key fire segment (+21%). However, due to greater claims from the same segment with some cushion from fewer motor claims, net claims incurred increased to 49.7% (+4.4ppts). Overall insurance service results hence declined by 12% with a higher combined ratio of 81.0% (+5.2ppts). On the other hand, net financial result rose by 160% led by fair value gains. Thanks to this, 1HFY23 net profit improved to RM137.8m (+16%).

Outlook. The group’s lion share fire class insurance appears to see persistent headwinds no thanks to the ongoing detariffication of the fire segment which is expected to stimulate more competitive market pricing. We could expect rising challenges from the motor segment as well with another round of liberalisation 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. That said, the group’s broad growth across all business fronts could be an indication of sustained market share going forward, aided by its affiliates.

Forecasts. We fine-tune down our FY23-24F earnings by 4% and 1%, respectively, as we refine our model inputs to reflect the new MFRS 17 requirements.

Maintain OUTPERFORM with a higher TP of RM14.70 (from RM14.50). Our TP is based on 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 (see Page 4).

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 - 28 Aug 2023