We maintain our BUY call on LPI Capital (LPI), pegging our MYR15.75 FV to a three-year P/E band of 19.4x FY13 EPS. We remain positive on the company's consistent track record of above-industry combined ratios, and attractive dividend yields of between 5% and 6%. No changes to our earnings forecasts for now as there were no major surprises from LPI’s 1Q results.

Results in line. LPI’s 1QFY13 earnings of MYR42.1m were in line, accounting for 23.4% and 21.5% of our and consensus’ full-year estimates for FY13. Earnings surged 33.8% from 1QFY12 despite a flat 4.8% growth in gross premiums. This was on the back of: i) a healthier claims ratio of 53.6% vs 60.1% in 1QFY12, during which it suffered from exposure to the Thais floods, and ii) an unusually low net commission ratio of 5.4% vs 8.6% in 1QFY12.

Unusually low commission ratio. We believe that the low net commission ratio of 5.4% is not likely to recur, although LPI recorded substantial reinsurance commission income. Its treaty agreements were profitable across all segments while its fire premiums segment in particular was highly successful, recording a commission ratio of a record-low 1.6%. Note that fire premiums continue to be a profitable segment, contributing approximately 36.2% to total premiums, but accounting for as much as 52.1% of underwriting income before management expenses.

Increase in technical reserves not a concern. We note that insurance contract liabilities rose from MYR1.15bn to MYR1.3bn while total assets stood at MYR2.92bn as at 31 March 2013, significantly boosting the company's financial position during that quarter. We do not see this as a major concern as the group typically recognizes higher technical reserves in 1Q, and we expect it to release a sizeable amount of technical reserves towards the end of the financial year. We gather that LPI released about MYR18m towards end-FY12.

Source: RHB