LPI’s  MYR201m  FY13  earnings  were  in  line,  making  up  103%  of  our forecast  and  implying  a  remarkable  21%  growth.  The  400ppt improvement in underwriting (UW) margins to 30% outweighed a slower 8% premiums growth. We expect better FY14 revenue growth, premised on faster GDP expansion,  although margins are not expected to grow. Maintain BUY, with our FV raised to MYR20.00 (from MYR18.70).

• A  year of significant margin expansion.  LPI’s FY13  earnings  surged 21%  y-o-y,  outpacing  its  8%  topline  premiums  growth.  This  robust performance was supported by: i)  a surge in UW  margins in the  general insurance  (GI)  segment  to  30%  (from  26%),  ii)  a  lower-than-usual effective  tax  rate  on  a  double  tax  deduction  on  the  Malaysian  Motor Insurance  Pool  (MMIP),  and  iii)  overall  11%  growth  in  investment performance.
• Not  deterred  by  flood  provisions.  Fire  premiums,  the  profitable segment of LPI’s insurance business, recorded a surge in claims ratio to 21.2% (FY12: 17.1%). Subsequently, the UW margin for  fire premiums was booked at 73% (from 75%). We understand that about MYR3-4m, or 10% of the net claims,  were  attributed to both actual claims as well as prudent provisioning for  property damage arising from  flash floods  that occurred frequently towards 4Q13. Nevertheless, a general improvement in  UW  margins  in  its  other  key  business  segments  offset  the  lumpy claims  for  fire  premiums  –  notably  the  high-risk  motor  premium  UW margin, which was maintained at 15% amid the theft losses and accident fatalities that normally occur in this segment.
• Maintain  BUY, FV upgraded to MYR20.00.  We adjust our FY14F/15F EPS upwards by 4%/6%, taking into account  a higher premiums  growth,as we expect higher GDP expansion  in FY14. We also see  higher-thanindustry  UW  margins  at  26%/25%  on  its  profitable  portfolio  mix.  At  an unchanged 20x target P/E (3-year average P/E) on revised FY14F EPS, LPI’s FV is now higher at MYR20.00 (from MYR18.70).
• Highlights  and  risks.  We  like  LPI.  It  is  a  quality  general  insurer  with sizable  exposure  to  the  high-profit  fire  premium  business,  solid  cost management  and  good  dividend  payout  policy,  which  justifies  its positioning as a premium stock.  Risks to our valuations  are:  i) irrational pricing  of  the  industry  fire  premium  hurting  revenue  growth,  ii)  weak returns from its investment portfolio, and iii) a surge in claims ratio.
• UW margins improved across all GI segments
• Claims ratios improved across all GI segments

Lower dividends to pay off borrowings.  LPI declared a second interim dividend of 52 sen. Its total DPS of 70 sen implies a payout  ratio of 76%, lower than its average 85-100%  of the past 10 years. We understand that the company op ted to  pay off its borrowings of MYR33m. Nevertheless we trim  our payout ratio lower to 80% (from 95%) to account for possible need to conserve capital.

Financial Exhibits

SWOT Analysis

Company Profile
LPI Capital (LPI) is primarily involved in the underwriting of general insurance, investment holding and financing leases .

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Source: RHB