LPI Capital posted net profit of RM276.6 million (declined of 20%) for financial year 2022 (FY22) and total dividends of 60.0 sen are above Kenanga Research’s expectations as earnings were supported by better policy retention and investment gains. LPI is likely to see greater competitive forces in its chief fire insurance and motor segments as further detariffication kicks in.
However, there could be support as peakish claims ease. Better MFRS 17 reporting could garner favour against its peers. Maintain OUTPERFORM with a higher target price (TP) of RM14.50 (from previous TP RM14.10) as the research house rolls over its valuation base year.
FY22 was stronger than expected, with a net profit of RM276.6 million beating the Street’s estimates by 10% and 5%, respectively. The positive deviation was due to higher-than-projected retention ratios alongside more supportive investment income thanks to 4QCY22’s stronger showing from GE15-inspired stock trading.
A second interim dividend of 35.0 sen was declared for a full-year payment of 60.0 sen (c.85% payout) which is deemed better than the widely-anticipated 55.0 sen in lieu of the abovementioned earnings outperformance.
On a yearly-basis, although FY22 gross written premiums rose by 4%, higher general provisions brought net earned premiums (NEP) down by 2%. Miscellaneous segments contributed mostly to the decline in NEP (-5%) while key Fire (-1%) and Motor (-3%) segments slightly moderated.
Whilst, retention ratio picked up in 4QFY22 to a higher full-year closing at 63.5% (+0.7ppt) as risk tolerance against macro uncertainties could be easing. Meanwhile, claims ratio surged to 44.0% (+7.5ppt) as returning economic activity brought about a normalisation of instances. Owing to this, combined ratio came in at 71.9% (+8.9 ppt) and dragged FY22 net profit to RM276.6 million (-20%).
Pilling competition met by easing fundamentals. In the near term, it is likely that LPI’s key fire insurance segment could see greater competition spurred by detariffication measures introduced by Bank Negara in Oct 2022. The motor insurance space would also see further tariff adjustments in 2HCY23. That said, there is some relief with regards to claims ratios as incidences are expected to be less aggressive from normalising activities.
In addition, the group saw higher reinsurance rates no thanks to severe strains to its coverage following the Dec 2021 floods situation. As more controls are expected to be implemented here going forward, so should too the spill-over to LPI.
Forecasts. Post results, Kenanga Research has raised its FY23F net profit by 6% as it input better policy retention rates, closer towards historical levels of 35% (from 40% previously inputted). Meanwhile, it introduce its FY24F numbers.
Note that the research house’s current forecasts and presentation do not account for changes brought by the newly implemented MFRS 17 which could trigger higher earnings recognition for LPI as it would be expected to tone down previously more conservative provisioning measures. Kenanga Research is pending for further clarity and guidance from the group before making the necessary adjustments to our models.
Maintain OUTPERFORM with a higher TP of RM14.50 (from RM14.10). At current price levels, there are buying opportunities as LPI’s premium remains justified based on its better dividend prospects and earnings, notwithstanding support from its affiliation with Public Bank.
While there is no guided impact with regards to MFRS 17 to group earnings, investors may be more inclined with LPI as opposed to peers that are expecting earnings erosion. There is no adjustment to the TP based on ESG given by Kenanga IB.
Risks identified include, lower premium underwritten; higher-than-expected claims; higher-than-expected management expense ratio.
