LPI Capital - Claims Ratio Sharply Better

LPI Capital’s lower-than-expected 9MFY12 earnings comprised only 71.7% and 66.4% of our and consensus’ full-year forecasts respectively. This was due to the higher-than-expected claims in 1HFY12 despite a perk-up in underwriting margin to 18.8% in its fiscal 3Q. We are slightly optimistic on the group's 4Q results as we see underwriting margins remaining robust, although still cautious on theindustry outlook. Maintain BUY and RM15.60 FV, based on a three-year 19.0x PE band on the company’s 12-month forward earnings.

Gross premiums, net profit higher. LPI Capital’s 9MFY12 total gross written premiums jumped 15.2% y-o-y. Its operating profit inched up 2.1% y-o-y while net tax profit increased by 3.8% y-o-y. The stronger bottom-line was attributed to: i) a 7.4% y-o-y growth in underwriting surplus before management expenses, and ii) improvement in claims ratio from 60.1% in 1QFY12 to 45.9% in 3QFY12. YTD claims ratio stood at 50.1%.

General insurance generally stronger. Thanks to management's prudent underwriting strategy, the general insurance segment saw improvements across the board for 9MFY12, namely in the form of: i) a better claims ratio across all general insurance segments except for the motor segment, ii) a dip in net commission ratio from 8.6% in 1QFY12 to 6.6%, iii) steady enhancement in the combined ratio from 89.2% in 1QFY12 versus 73.1% in 3QFY12, and iv) underwriting margin strengthening from 7.0% in 1QFY12 to as high as 24.1% for 3QFY12, making YTD underwriting margins at 18.8%.

Overall claims down sharply. The group’s current 50.1% claims ratio is superior to the industry average of ~60%. Its claims ratio across most segments improved sharply i.e. fire (3QFY12: 14.9% vs 1QFY12: 30.5%), cargo, hull, aviation and offshore (3QFY12: 19.4% vs 1QFY12: 43.9%), and miscellaneous claims (3QFY12: 45.0% vs 1QFY12: 69.0%). However, claims lodged with the motor segment – which remained the highest – were largely unchanged at 76.7% for 9MFY12.

Maintain BUY; slightly positive on 4QFY12. We maintain our BUY call on LPI with our FV unchanged at RM15.60, based on a three-year 19.0x PE over the counter’s 12- month forward earnings. That said, we are slightly optimistic on the group's 4Q, this being a historically good quarter in terms of underwriting margins. The downside risks to our valuation are: i) a repeat of the 1Q high loss ratio in 4Q, ii) unexpected losses at the Malaysian Motor Insurance Pool (MMIP), and iii) adverse impact from LPI's exposure to reinsurers given that the group’s retention rate - at 65.4% - reflects huge premiums being ceded to reinsurers.

Source: OSK