LPI’s 9MFY23 results met our expectations in spite of rising reinsurance pressures thanks to support from investments. We anticipate LPI to remain resilient in defending its market share, backed by a leading financial institution and brand equity. We tweak our FY23−24F earnings down by <1% as we incorporate additional data to our model inputs. Maintain our TP of RM14.70 and OUTPERFORM call.

9MFY23 within our expectations. LPI’s 9MFY23 net profit of RM235.1m was within our full-year forecast (78%) but above consensus full-year estimates (81%). The positive deviation from its end could be due lower-than-expected revenue growth (possibly from fire class products) which is undergoing competitive pressures from detariffication.

Effective 1 Jan 2023, the group 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 restated 3QFY22’s net profit and ROE have risen by 6% and 0.1ppt, respectively.

YoY, 9MFY23 insurance service revenue increased by 12% following further strengthening in LPI’s fire segment (+20%) on top of moderate growth across all segments. That said, owing to heightened reinsurance premiums (retention ratio falling to 63.9%, -9.4ppt) likely spurred from higher cession and excess of losses to reinsurers. On the other hand, thanks to stronger investment income driven by better trading markets, pretax profits still improved by 13%. In addition to lower effective taxes, 9MFY23 net profit landed at RM235.1m (+19%).

Outlook. Despite the competitive landscape for fire class insurance seemingly widening from the recent detariffication, LPI remains successful in retaining growth on a quarterly basis, likely supported by its affiliates. The group could also continue to leverage the broader economic growth to induce more projects into its miscellaneous segment. On the other hand, 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, driving persistent revaluation of its reinsurance coverage.

Forecast. Our FY23−24F earnings were fine-tuned as we refine our model inputs to reflect the new MFRS 17 requirements alongside 3QFY23’s reported numbers.

Maintain OUTPERFORM with TP of RM14.70. 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) higherthan-expected claims, and (iii) higher-than-expected management expense ratio.

Source: Kenanga Research - 25 Oct 2023