We remain positive on LPI even if the upcoming fire insurance review were to conclude adversely. We believe it would not be overly detrimental to the group’s portfolio, as it does not affect its sizeable non-housing policies. Meanwhile, product diversification and growing its agency base will help to cushion it against market headwinds. BUY with TP of RM15.90 based on 3.0x FY20E PBV valuation (close to the stock’s 3-year forward average), a level which we believe the market can support as the stock has firm backing from Public Bank. Furthermore, its 5% dividend yield could appeal to yield-seeking investors assuming the group maintains its 2-year historical payout of c.86%.

The industry is keeping an eye on Bank Negara’s liberalisation review on the fire class insurance, likely to be presented by end of Jun 2020. Currently, fire insurance makes up c.40% of LPI’s gross earned premium (GEP) and c.65% of underwriting surplus before management expenses. However, we gathered that the loss of business would not be as detrimental as expected. For one, the segment is heavily exposed to non-housing fire policies (i.e. industrials) which are typically subject to below-tariff rates and hence not affected by the review.

Additionally, having partially implemented premium rate adjustments (-30%) in 2017 as opposed to the complete de-tariffication as with motor, it is likely that Bank Negara will not entirely deregulate this insurance class owing to its high value to the insurance sector. That said, referred business from Public Bank would still support this segment’s GEP despite adverse market conditions.

For motor insurance (c.20% GEP), margins appear to have stabilised in a liberalised environment, with FY19 net claims incurred ratio of c.75% (from 50-60%). Meanwhile, sales could be driven by national car launches this year.

On the other hand, the 22% YoY decline in the Miscellaneous segment’s underwriting surplus was stemmed by unfavourable rates from now scrapped products. We anticipate FY20 to feature less of such products with more detailed review of offerings, while the possible resurgence of national infrastructure projects could be a plus for this segment.

The near-term insurance industry landscape could be challenging arising from economic uncertainties mainly from the ongoing Covid- 19 pandemic and geopolitical instabilities. To shield itself, the group looks to offer a greater range of products (i.e. medical, health, liabilities) while widening its agency force (targeted agent base growth of 10% annually).

Source: Rakuten Research - 18 Feb 2020