LPI Capital : Stronger underwriting performance with improved claims ratio HOLD

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LPI Capital : Stronger underwriting performance with improved claims ratio         HOLD

KMaintain our HOLD call with unchanged fair value of RM17.50/share based on sum-of-parts valuation. LPI Capital (LPI) reported a higher core net profit of RM82mil (+4.8%QoQ). This was contributed by a marginal increase in gross earned premiums (+0.9%QoQ) and lower net claims (-11.1%QoQ). For 12MFY16, core earnings, after stripping out gains of RM150mil from disposal of equity (Public Bank shares) held for investments, grew strongly by 17.2%YoY to RM287mil. Cumulative core earnings came in above our estimate of RM269mil (106.0% of forecast). This was contributed by higher than expected net earned premium and lower claims. ROE for 12MFY16 based on core earnings was 16.0%, higher than 12MFY15's 14.0%.

Key operating ratios remained strong. 12MFY16 saw the Group's combined ratio improve to 64.6% (12MFY15: 67.5%). This was contributed by lower claims and management expense ratio of 38.3% and 21.3% respectively in FY16 compared to 41.0% and 21.7% in FY15.

The Group's investment portfolio remained conservative with 35.0% its investments in equity. More than 90.0% of these investments are in Public Bank shares (a defensive stock). A 2nd interim dividend of 55 sen was declared. 12MFY16 dividends were 80 sen/share (payout : 93.0% against core earnings) and above our expectation of 70 sen/share. We tweaked our net profit estimates for FY17/18 higher by 6.7%/3.0% respectively to RM298.8mil and RM310.7mil respectively to factor in lower claims ratio assumptions. 5 years historical average P/BV for the stock was 2.5x. The stock continues to trade at a rich valuation, higher than the average P/BV ratio for M&As of 2.0x for general insurance companies at 2.8x to our FY17 BV/share.

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