LPI Capital (LPI) is an established and diversified general insurance company. Its general insurance business is operated through a wholly owned subsidiary, Lonpac Insurance (Lonpac). Lonpac is the largest insurance company in fire insurance. The Group is related to Public Bank with Tan Sri Dato'

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LPI Capital : Strong underwriting performance but stretched valuation   HOLD

LPI Capital (LPI) is an established and diversified general insurance company. Its general insurance business is operated through a wholly owned subsidiary, Lonpac Insurance (Lonpac). Lonpac is the largest insurance company in fire insurance. The Group is related to Public Bank with Tan Sri Dato' Sri Dr. Teh Hong Piow as the Chairman of LPI and common shareholder.

Management is conservative and prudent in underwriting. This has been reflected by its lower retention ratio of 58.6% compared to the industry's 72.3% in 2015. Key operating ratios are stronger compared to the general insurance industry. It has a low combine ratio of 67.5% compared to the industry's 88.3% in 2015. Claims and commission ratio of 41.0% and 4.8% respectively were much lower compared to the general insurance industry's 56.5% and 9.9% in 2015.

Conservative investment portfolio. 40.0% of the Group's investments are in equity. 90.0% of these investments are in Public Bank's shares (defensive stock). This mitigates the risk of the potential impairment of securities in market downturn. Stable group's core earnings with CAGR of 12.3% over the last 5 years (FY11-FY15) after stripping out realised gains from disposal of Public Bank shares and consistent reporting of underwriting surplus.  Decent ROE of 14.7% and 13.7% for FY16 and FY17 respectively. Stable dividend payments. We forecast both FY16 and FY17 dividends to be 70 sen/share, translating into yield of 4.2%. 5 years historical average P/BV for the stock is 2.5x. Based on current market price, the stock is trading at 2.6x to our FY17 BV/share. This is higher than the P/BV of its peers, Allianz and Tune Protect and the average P/BV of 2.0x for M&A deals of general insurance companies. Valuation of the stock appears stretched. We initiate coverage on LPI with a HOLD call and fair value of RM17.50 based on sum-of-parts valuation. Generally, liquidity is lower for insurance stocks compared to bank shares.

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