LPI’s  MYR166m  9M14  profit,  at  75%  of  our/consensus estimates,  is  in line. Despite soft topline growth, the 11% bottomline increase was aided by  a  210bps  improvement in underwriting  (UW)  margin  and  expansion of its profitable fire insurance  unit.  Maintain BUY,  and a  MYR20.70  TP(18x P/E,  18.4% upside).  We expect   in 4Q14  an  interim  dividend/share similar to 4Q13’s MYR0.52 to help fulfil our assumption of a >5% yield.

9M14 performance  in line.  LPI  Capital (LPI)’s 9M14 earnings  growth of 11% y-o-y was due  to a sustained profitable  track record by subsidiaryLonpac Insurance.  The key takeaway is  a surge in UW margins in the general  insurance  (GI)  segment  of  210bps  to  30.6%  (from  28.5%), mainly  reflected  by  an  improved  product  mix  especially  from  fire insurance  (its  most  profitable  business  portfolio)  and  sustained  loss ratios  across  its  motor  and  non-motor  segments.  Its  management expense ratio was  stable at 19.1%  (vs 18.8% in 9M13), indicating  cost control.  These  factors  offset  a  soft  4%  gross  written  premium  (GWP) growth  due  to  a  challenging  operating  environment  and  increased competition from other general insurers across Malaysia and Singapore. 

Fire insurance still  a winner.  The UW margin  for  its  fire  segment grewto  79%  (vs  75%  in  9M13),  as  its  fire  net  claims  ratio  improved significantly to 16%  (from 21% in 9M13). This was  in line with the levels of 1Q14 and 2Q14  –  which indicated that its business had  sizeable  and healthy risk diversification. LPI’s  overall  portfolio remains healthy, as  its overall claims ratio rose to 46.5% from 44.8% in 9M13. The motor claims ratio,  at  75%,  improved  slightly  from  76%  in  9M13  and  is  in  line  with current industry trends. 

Maintain  BUY  and  a  TP  of  MYR20.70,  pegged  to  an  unchanged  18x FY15F P/E  and implying  a  2.3x FY15F P/BV. While we like LPI  for its profitable product mix,  our TP is at the lower range of its historical  2.3-2.4x  P/BV  and  18-20x  P/E  to  reflect  the  risks  in  the  longer  term.  We retain our forecasts, as there were no surprises in earnings. Traditionally, LPI  announces  a  handsome  second  interim  dividend  towards  the  4Q. Our full-year MYR0.89 DPS estimate translates to a >5% yield. 

Risks.  A  lower dividend payout  and  uncertainties in competition/pricingas the industry prepares for the liberalisation of fire and motor tariffs in 2016.  Lonpac  has  a  combined  57%  exposure  in  fire  and  motor premiums. While  increasing  competition  has  resulted  in  the  erosion  of premium rates, it is  is boosting online offerings and new  segments while focusing on cost efficiency and distribution.

Source: RHB