KEY INVESTMENT HIGHLIGHTS

• FY19 normalised profit managed to grow marginally by +2.1%yoy to RM320.6m which is within our expectation

• Steady top-line growth with FY19 gross written premium (GWP) rose by +3.7%yoy to RM1.5bn but transitional challenges remain from industry liberalisation

• Higher FY19 net claims incurred which jumped by +16.7%yoy to -RM444.5m reduced earnings momentum

• Maintain NEUTRAL with a revised TP of RM15.50

Within expectations. LPI Capital’s (LPI) 4QFY19 normalised earnings grew marginally by +3.1%yoy to RM86.6m. Meanwhile, the full year FY19 normalised earnings increased by +2.1%yoy to RM320.6m which is within our expectation. This translated to about 97.2% and 99.3% 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 +8.7%yoy to RM1.0b. However, the higher NEP was mainly moderated by the +16.7%yoy jump in net claims incurred to -RM444.5m due to rising claim costs, resulting in a drag of earnings growth.

Steady top-line growth. For FY19, the group resiliently achieved a positive growth in GWP (+3.7%yoy) of RM1.5bn despite the continued declining trend in the general insurance industry. To put things in perspective, the industry posted a decline in GWP of -1.0%yoy for 9MCY19. We are of the view that the group’s higher GWP was attributable to the continued infrastructure projects and the strengthening of its distribution channels. Nonetheless, we opine that that the ongoing motor and fire liberalisation exercise continues to add downward pressure on premium pricing.

Combined ratio worsens to above 70%. LPI’s FY19 combined ratio rose to 70.4% through an increase of +2.5ppts(yoy). This was resulted primarily from the rise in claims ratio by +3.0ppts(yoy) to 43.9%. The higher claims ratio was mainly attributable to the jump in net claims incurred by +16.7%yoy to -RM444.5m. We opine that this was also partially due to the group continuing to retain more risks as reflected by the increase in retention ratio of +1.8ppts(yoy) to 67.6%. In addition, the motor, medical and miscellaneous accident insurance were the main areas of concern. This was evident from the rising FY19 net claims incurred for motor and miscellaneous by +12.0%yoy and +31.4%yoy to -RM235.9m and -RM151.1m respectively. Nonetheless, this led to a marginal increase of +0.3%yoy in the underwriting profit to RM299.2m due to higher NEP. Moving forward, we believe that the unfavourable claims environment and heightened competitive pricing pressure might continue to weigh on claims ratio as well.

Source: MIDF Research - 4 Feb 2020