We  downgrade  LPI  to NEUTRAL as  its premium valuation has  already priced  in expectations of superior underwriting margins  and  an  aboveindustry  premiums  growth  of  >13%.  Moreover,  even  if  the  group’s underwriting  income  improves  further,  its  earnings  upside  may  be constrained by lacklustre growth in its investment income. We maintain our MYR15.75  FV, pegged to  a  19.6x three-year P/E band of  the stock’s FY13 EPS.

- Superior underwriting margins.  Given  LPI’s  strong market position in non-motor  premiums,  with  a  high  proportion  of  fire  premiums  in  its overall  portfolio,  the  Company's  underwriting  margin  to  remain  better than  the  industry  average.  In  FY12,  its  underwriting  margin  stood  at 26%,  more  than  double  the  industry’s  12.6%.  As  underwriting  margins are  seasonally  lower  in  1Q,  we  expect  the  ratio  to  normalise  to  its average  in  the  subsequent  quarters.  We  maintain  our  forecast premiums growth of  >13%  for LPI, which we  deem  achievable  although the Group posted only 4.8% y-o-y premiums growth in 1QFY13.

- Expect  lacklustre  movements  in  investment  income.  We  are  less bullish  on  LPI’s  investment  income  given  its  substantial  exposure  to dividend income from equity investments in  sister company,  Public Bank (PBK, FV: MYR18.00).  For instance, when Public Bank  adopted a  lower dividend payout ratio  for FY12  due to  the need to conserve  capital,  LPI saw  its  dividend  income  shrink  by  MYR3.1m.  This,  together  with  a MYR3.6m  increase in interest income,  led to only a  marginal change in group investment income.  Moving forward, we think any upside potential in LPI’s  total earnings may be  capped  by its investment income  should Public Bank choose to maintain the same quantum of dividend instead of reverting to its historical payout ratio.

- Downgrade  to  NEUTRAL.  We  downgrade  our  recommendation  to NEUTRAL as we see limited upside in the stock, which is already trading at a premium to the industry.  Moreover, we think its premium valuations have already priced in expectations of superior underwriting margins. We maintain our FV  of  MYR15.75, pegged to 19.6x three-year P/E band of its FY13 EPS.

Source: RHB