KEY INVESTMENT HIGHLIGHTS

• 9MFY19 normalised profit increased marginally by +1.2%yoy to RM232.6m which came in within our and consensus expectations

• Continued top-line growth with 9MFY19 gross written premium (GWP) rose by +3.6%yoy to RM1.1bn

• However, higher net claims incurred which grew by +20.0%yoy to -RM337.6m which dragged earning growth

• Maintain NEUTRAL with an unchanged TP of RM16.20

Within expectations. LPI Capital’s (LPI) 9MFY19 normalised earnings grew marginally by +1.2%yoy to RM232.6m. This translated to about 70.3% and 70.0% of ours and consensus’ full year FY19 estimates. The uptick in net profit was mainly attributable to higher net earned premiums (NEP) which rose by +10.2%yoy to RM746.0m. However, the higher NEP was partially moderated by the +20.0%yoy jump in net claims incurred to -RM337.5m, resulting in slower earnings growth.

Top-line growth managed to stay positive. In 9MFY19, the group resiliently achieved a positive growth in GWP (+3.6%yoy) of RM1.1bn despite the overall declining trend in the general insurance industry. To put things in perspective, the industry posted a decline in GWP of - 1.7%yoy for 1HCY19. We are of the view that the group’s higher GWP was a result of the continued infrastructure projects and the strengthening of its distribution channels. Nonetheless, we opine that that the motor and fire liberalisation exercise continues to be putting downward pressure on premium price.

However, combined ratio deteriorated. LPI’s 9MFY19’s combined ratio worsens to 72.5% through an increase of +1.8ppts(yoy). This was primarily due to the rise in claims ratio by +3.6ppts(yoy) to 45.2%. Note that the higher claims ratio was predominantly caused by the jump in net claims incurred by +20.0%yoy to -RM337.5m. We postulate this was partially due to the group continues to retain more risks as reflected by the increase in retention ratio of +1.9ppts(yoy) to 66.8%. In addition, the medical and miscellaneous accident insurance are the main area of concern that contributed to higher claims. Consequently, this led to a slight decrease of -1.2%yoy in the underwriting profit to RM205.1m. Moving forward, we believe that an unfavourable claims environment and heightened competitive pricing pressure might continue to add pressure on claims ratio as well.

Source: MIDF Research - 16 Oct 2019