We  deem  LPI’s  MYR102m  1H14  profit  as  in  line  at  46%  of  our  and consensus  estimates.  The  15%  bottomline  growth  surpassed  5% premium  growth,  due  to  a  290bps  improvement  in  underwriting margins. Its fire premium business continues to chart low claims ratio s. Maintain  forecast  and  BUY  with  a  MYR20.70  FV  (18x  FY15F  P/E).  LPI also announced a first interim dividend of 20 sen vs 1HFY13’s 18 sen.

1H14  performance  was  in  line.  LPI  Capital  (LPI)’s  1H14  net  profit growth of 15% y-o-y was due to a sustained track record  of profits by  its subsidiary,  Lonpac  Insurance.  It  achieved:  i)  a  surge  in  underwriting (UW)  margins in general insurance (GI)  by  290bps to  30% (from 27%), and  ii)  a  sustained  investment  performance.  Meanwhile,  gross  written premium  (GWP)  growth  was  just  5%  due  to  a  challenging  operating environment  and  increased  competition  from  other  general  insurersacross  both  Malaysia  and  Singapore.  Lonpac’s  business  reached  a scalable level with >MYR1bn in GWP, while it retained its position as one 
of the top five players  in the industry, relative to three years ago.   Cost control is still evident, as LPI’s management expense ratio is only slightlyhigher at 19.9% vs 19.3% in 1H13 despite increased costs booked at the investment holding level.

Fire  premiums  continue  to  perform  well.  Fire  premiums,  Lonpac’s most  profitable  segment  and  a  main  revenue  driver  (38%  of  GWP portfolio), continue  to grow (+7% y-o-y).  UW margins  for this segment improved  to  80.5% (vs  73.8% in 1HFY13). The bet claims ratio for fire premiums declined significantly to  15.9%  (vs 22.4% in 1H14  and  17.3% in 1Q14), pointing to  a sizable and healthy risk diversification portfolio in this business. Its commission ratio was almost unchanged at 3.6%. 

Maintain BUY  and  a FV of MYR20.70  (18x FY15F  P/E). This translates to  an implied 2.3x FY15F P/BV.  While we like the stock for its profitable product  mix,  we  peg  our  FV  at  the  lower  end  of  its  historical  2.3 -2.4x P/BV and 18-20x P/E to take into account further risks in the longer term (elaborated in the next paragraph). We maintain our  earnings  forecasts, as the results were within expectations. 

Risks.  We foresee more uncertainties in competition/pricing from FY15onwards,  as the  industry prepares for the expected liberalization of fire and  motor  tariffs  in  2016.  LPI  alluded  that  increasing  competition  had resulted in  an erosion of premium rates.  Lonpac has a combined 57% exposure in fire and motor premiums.  It  is  also  boosting online offeringsand new segments, while focusing on cost efficiencies and distribution. 

Source: RHB