LPI’s MYR51m 1QFY14 profit was in line, accounting for 23% of our and consensus estimates. Its subsidiary fared well despite a traditionally weak quarter, charting 12% premium growth and a 530bps surge in underwriting (UW) margins y-o-y. We adjust our FY14F/15F EPS by 1%/4% to incorporate a lower commission ratio. Maintain BUY, with a higher MYR20.70 FV, pegged to an 18x FY15F P/E (from FY14F 20x).

• Strong start for 2014. LPI Capital (LPI)’s net profit jumped 20% y-o-y, marking a strong start to 2014 even though 1Q is traditionally a weak financial quarter. Its subsidiary, Lonpac Insurance, achieved: i) a 530bps spike in UW margins in the general insurance (GI) segment to 24% (from 19%), ii) 12.4% gross written premium (GWP) growth, and iii) sustained investment performance and interest income to the holding company.
• Fire premium, fiery performance (with lower claims). Fire premium, Lonpac’s profitable segment and a main revenue driver (37% of GWP portfolio), continued to grow (+14% y-o-y, +36% q-o-q) despite Bank Negara’s cooling measures to rein in speculation in the property segment. More importantly, its UW margin widened to 83.9% (vs 71-74% historically) due to several key reasons. Net claims ratio for fire premium declined significantly (17.3% vs 22.5% in 4Q13 and 25.4% in 1Q13), offset against lumpy fire claims attributed to flash floods in 4Q13. Still, a noticeable inflow of reinsurance commission income lowered its net commission ratio substantially.
• BUY, FV rises to MYR20.70 (from MYR20.00). We peg our FV to a rolled over FY15F P/E of 18x (vs 20x FY14F). This translates into an implied 2.3x FY15F P/BV, and is at the lower end of the stock’s historical 2.3-2.4x P/BV and 18-20x P/E. We like LPI as it is a premium general insurer with superior UW margins due to its profitable product mix. Given the low commission ratio, we adjust our FY14F/15F EPS 1%/4% higher as we adjust our estimated commission ratios to 4-5% (from 6.6%). We also tweak our UW margins to 40-41% (from 39%).
• Risks.We expect more competition/pricing uncertainties in FY15 as the industry braces for the anticipated liberalisation of fire and motor tariffs in 2016. Lonpac has a combined 57% exposure in fire and motor premiums. Its strategies include: i) ramping up online offerings, ii) new target segments, and iii) improving cost efficiencies and distribution. It has streamlined its UW department and set up a comprehensive actuarial department in advance to improve its risk-pricingstrategies.
• UW margins improved noticeably in fire premiums, the insurer’s biggest revenue driver
• Claims ratios improved among the two major segments (motor and fire)

Financial Exhibits

SWOT Analysis

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

Recommendation Chart

Source: RHB