LPI’s 1HFY24 results met expectations from further reversals of flood reserves of prior years. While these are anticipated to ebb in FY25, LPI may still be favoured for its leading position in the competitive fire class insurance segment. This is particularly supported by backing from Public Bank. Dividend yields of c.6% also appear highly compelling for an insurer. Maintain OUTPERFORM and TP of RM15.00.

1HFY24 within expectations. LPI’s 1HFY24 net profit of RM179.3m made up 47% of our full-year forecast and 50% of consensus full-year estimate. An interim dividend of 30 sen is also in line with our expectations with a lumpier 2H distribution anticipated, hopeful to land at a full-year payment of 86 sen (90% payout).

YoY, 1HFY24 net earnings expanded by 30% mainly on the back of reinsurance reserves from past flood incidences seeing reversals during the period (likely to normalise to a slightly higher base in the medium term) for its fire class insurance products. This is reflected in a swing in retention ratio to 73.1% (+8.9 ppt). Meanwhile, we note that insurance service revenues were flattish as the same fire class insurance products are likely underpinned by ongoing detariffication within the space.

QoQ, 2QFY24 profits dipped by 23%, no thanks to sequentially softer dividend income which is typically distributed during 1Q and 3Q.Normalising for dividend income between the quarters, net income would have still declined by 4% on higher claims experienced. On the flipside, we highlight that the abovementioned fire class insurance segment saw an increase in insurance revenues as mortgages could have picked up following better income inflows from 1Q.

Highlights. While we continue to believe pressures could be mounting in the fire insurance space following the industry’s detariffication, we are comforted by LPI’s sequential improvement in growing its books.Directionally, the group should be expected to retain its slice of the market as long as its affiliate PBBANK continues to expand its mortgage books, albeit now at a lower ticket size per account.

We are also unconcerned with its other insurance products as the group continues to invest in its agency force in addition to the natural accretion from its bancassurance networks. That said, its expansionary efforts may not translate well into earnings growth in the coming year in lieu of the possible normalisation of reinsurance reversals which seem more engrained in FY24.

Forecast. Maintained.

Maintain OUTPERFORM and TP of RM15.00. Our TP is based on an unchanged 2.6x FY25F PBV. This represents a 25% premium against the industry average of 2.1x which we believe is fair given: (i) better net margins of 17% (vs peer’s 11%), and (ii) higher dividend returns of 6%- 7% (vs peer’s 4%-5%). LPI’s premium valuation may also be supported by its long-term viability 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 - 22 Aug 2024