FINANCIAL SERVICES

LPI CAPITAL
(LPI MK EQUITY, LOND.KL) 4 Feb 2021

Subdued GWP growth; lower net claims

Company report HOLD
Kelvin Ong, CFA (Maintained)
kelvin-ong@ambankgroup.com
03-2036 2294 Rationale for report: Company results/update

Price RM13.46 Investment Highlights

Fair Value RM13.50
52-week High/Low RM15.30/RM9.90
 We maintain our HOLD recommendation on LPI Capital
Key Changes (LPI) with revised fair value of RM13.50/share from
Fair value  RM13.60/share. Our fair value is based on FY21 P/BV of
EPS  2.5x, supported by an ROE of 16.2%. We continue to see
the stock as fairly valued. We tweak our FY21/22 net profit
YE to Dec FY20 FY21F FY22F FY23F
marginally by 0.4%/-1.1% after fine-tuning our claims
Net Earned Premium (RM mil) 1,016 1,056 1,097 1,140 ratio assumptions.
Core net profit (RM mil) 337 349 366 390
FD Core EPS (Sen) 84.5 87.6 91.9 98.0
FD Core EPS growth (%) 4.5 3.6 4.9 6.7
 LPI recorded a higher net profit of RM95mil (+10.5% QoQ)
Consensus net profit (RM mil 0 343 363 - in 4Q20. This was supported by the release of unearned
DPS (Sen) 72.0 75.7 79.5 84.8 premium reserves in the quarter which increased its
BV/share (RM) 5.2 5.6 6.0 6.4
15.9 15.4 14.7 13.7
gross earned premium (GEP) as well as due to lower net
PE (x)
Div yield (%) 5.3 5.6 5.9 6.3 claims. Claims ratio was lower for most classes of
P/BV (x) 2.6 2.4 2.3 2.1 insurance except for trade credit and bond insurances.
ROE (%) 16.6 16.2 15.9 15.9
Net Gearing (%) nm nm nm nm
Stock and Financial Data  12M20 core earnings of RM337mil grew by 4.5% YoY,
contributed largely by lower claims due to the
Shares Outstanding (million) 398.4 implementation of the movement control order (MCO).
Market Cap (RM mil) 5,362.5 Cumulative net profit was within expectations, making up
Book Value (RM/share) 5.21
P/BV (x) 2.6 105.3% of our and 104.1% of consensus estimate
ROE (%) 16.6 respectively.
Net Gearing (%) -

Major Shareholders Consolidated Teh Holdings (42.7%)  For 12M20, GWP climbed 1.7% YoY to RM1.55bil. LPI’s
Sompo Holdings (8.5%) net earned premium (NEP) for 12M20 was flattish at
RM1.02bil (+0.4% YoY). The group’s retention ratio was
Free Float 48.7
Avg Daily Value (RM mil) 1.3 marginally lower at 66.3% in 12M20.

Price performance 3mth 6mth 12mth  Underwriting margin for 12M20 improved to 32.9% vs.
29.6% in 12M19, supported by lower claims and
Absolute (%) 5.5 2.0 (9.1)
Relative (%) (2.6) 1.3 (12.6) commission expenses.

20.0 2,000  Claims ratio declined to 41.2% in 12M20 compared with

18.0 1,800 43.9% in 12M19 with the improvement of motor, marine,
16.0 1,600 aviation & transit and the miscellaneous segments’
14.0 1,400 ratios. Meanwhile, claims ratio for fire insurance was
12.0 1,200
steady at 12.4%.
10.0 1,000
8.0 800
 Management expense ratio was sustained at 19.7% while
6.0 600
the commission ratio improved to 6.1% for 12M20. The
4.0 400
latter was due to higher commission income with the
2.0 200
increase in premiums ceded out to reinsurers. The group
0.0 0
Feb-16 Feb-17 Feb-18 Feb-19 Feb-20 registered an improved combined ratio for 12M20 of
67.1% (12M19: 70.4%).
LPI MK FBMKLCI Index

 Aging of insurance receivables remained healthy with

89.7% of the total receivables falling within 90 days.
LPI Capital 4 Feb 2021

EXHIBIT 1: LPI CAPITAL RESULTS SUMMARY

Income Statement (RM Mil, FYE 31 Dec) 4Q19 3Q20 4Q20 % QoQ % Yoy 12M19 12M20 % Yoy
Operating revenue 399 396 422 6.7% 5.8% 1,603 1,622 1.2%
Gross earned premium 380 377 405 7.5% 6.7% 1,496 1,531 2.3%
Net earned premium 266 254 273 7.4% 2.8% 1,012 1,016 0.4%

Investment income 20 19 17 -7.8% -11.5% 106 91 -15.0%

Realised gains and losses 0 0 0 na na 0 0 -50.0%
Fair value gains and losses 0 6 1 na na 2 2 29.4%
Commission income 24 23 26 12.9% 8.2% 102 113 10.2%
Other operating income 4 3 2 -12.1% -35.5% 7 6 -10.7%
Other income 48 51 47 -7.9% -2.0% 217 212 -2.6%

Gross claims paid -158 -142 -150 6.1% -4.8% -596 -528 -11.4%
Claims ceded to reinsurers 41 44 52 18.2% 25.4% 185 167 -9.7%
Gross change in contract liabilities 45 -164 -125 -23.9% -376.8% 81 -342 -523.3%
Change in contract liabilities ceded to reinsurers -35 162 130 -19.8% -469.5% -114 284 -349.1%
Net claims incurred -107 -100 -94 -6.4% -12.1% -445 -419 -5.8%

Realised losses 0 0 0 na na 0 0 na
Fair value losses -2 0 -9 na na 0 -1 482.4%
Commission expense -43 -43 -45 4.5% 6.5% -171 -175 2.3%
Management expenses -46 -49 -48 -0.7% 5.1% -199 -200 0.5%
Impairment losses 0 0 0 0 -1 na
Other expenses -90 -92 -94 1.4% 3.8% -370 -376 1.7%

Operating profit 116 112 123 10.1% 6.5% 414 432 4.3%
Finance cost 0 0 0 -1.8% -6.9% -1 -2 26.6%
Share of profit after tax of equity accounted associate company 0 1 0 -29.7% -774.1% 2 3 68.2%

Profit before tax 115 112 123 10.0% 6.9% 415 434 4.5%
Tax expense -29 -26 -28 8.2% -2.3% -92 -97 4.8%
Net profit after tax 87 86 95 10.5% 10.0% 322 337 4.5%
Recurring/core net profit 87 86 95 10.5% 10.0% 322 337 4.5%
Core EPS (sen) 21.7 21.6 23.9 10.5% 10.0% 80.9 84.5 4.4%

Ratios (%)
Reinsurance ratio 30.0% 32.6% 32.6% 32.4% 33.7%
Retention ratio 70.0% 67.4% 67.4% 67.6% 66.3%
Claims ratio 40.3% 39.5% 34.4% 43.9% 41.2%
Commission ratio 7.0% 8.0% 7.1% 6.8% 6.1%
Management expense ratio 17.3% 19.1% 17.7% 19.7% 19.7%
Combined ratio 64.6% 66.7% 59.2% 70.4% 67.1%
UW margin 35.4% 33.3% 40.8% 29.6% 32.9%
ROE 17.9% 19.5% 20.2% 15.6% 16.6%

Breakdown by segments

Fire
Net earned premium (RM Mil) 113 103 120 16.3% 6.7% 419 415 -0.8%
Underwriting surplus before management expenses (RM Mil) 93 84 100 18.9% 7.4% 338 344 2.0%
Claims ratio (%) 10.0 10.4 10.4 12.3 12.4
Commission ratio (%) 7.1 7.9 6.1 7.1 4.7
Retention ratio (%) 70.8 68.0 70.5 66.7 65.9

Motor
Net earned premium (RM Mil) 86 85 87 2.5% 1.3% 326 342 4.9%
Underwriting surplus before management expenses (RM Mil) 15 18 26 38.8% 75.9% 59 75 27.6%
Claims ratio (%) 73.6 68.7 60.9 72.4 68.5
Commission ratio (%) 9.5 9.6 9.7 9.6 9.6
Retention ratio (%) 97.8 95.5 95.4 95.7 95.8

Marine, Aviation & Transit

Net earned premium (RM Mil) 5 5 4 -14.2% -22.9% 19 17 -12.2%
Underwriting surplus before management expenses (RM Mil) 4 6 0 -92.9% -88.3% 16 15 -5.4%
Claims ratio (%) 32.4 -28.2 102.9 30.5 24.1
Commission ratio (%) -6.6 -7.7 -14.2 -21.0 -15.2
Retention ratio (%) 24.7 22.3 17.8 22.7 20.4

Miscellaneous
Net earned premium (RM Mil) 62 61 62 0.7% 0.0% 247 242 -2.3%
Underwriting surplus before management expenses (RM Mil) 28 24 33 37.1% 17.8% 85 100 16.8%
Claims ratio (%) 49.7 53.2 39.3 61.1 53.6
Commission ratio (%) 4.5 7.2 6.8 4.3 5.1
Retention ratio (%) 55.3 53.2 51.1 56.2 52.5

Source: Company, AmInvestment Bank Bhd

AmInvestment Bank Bhd 2

LPI Capital 4 Feb 2021

 Fair value reserves expanded to RM748.2mil in 4Q20 vs. RM533.7mil in 3Q20. This was contributed by fair value
gains on FVOCI securities (mainly Public Bank shares) in the quarter.

 The group declared a 2nd interim dividend of 44 sen/share. Together with the 1st interim dividend of 28 sen/share,
total dividends for FY20 were 72 sen/share (payout: 85.2%) close to our projection of 71 sen/share. On absolute
basis, dividends were higher than FY19’s 70 sen/share (payout: 86.5%)

 We expect growth in GWP to remain modest in FY21. Premiums for motor insurance could benefit from the
higher sales of new passenger cars from the extension of the SST until 30 June 2021. Nevertheless, with
lockdowns imposed again due to the spike in Covid-19 cases, consumer and business sentiment remains
fragile for purchase of larger ticket items such as properties in the near term until firmer signs of economic
recovery are seen. This is expected to impact the GWP growth of fire insurance which is the largest segment
of LPI’s insurance business.

EXHBIT 2: PB BAND CHART EXHIBIT 3: PE BAND CHART

4.00 25.00

3.50
20.00 +1δ
+1δ
3.00
Avg Avg

2.50 -1δ -1δ

15.00

2.00

10.00
1.50

1.00
5.00
0.50

0.00 0.00
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-18
Nov-18
Jan-19
Mar-19
May-19
Jul-19
Sep-19
Nov-19
Jan-20
Mar-20
May-20
Jul-20
Sep-20
Nov-20
Jan-21

Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-18
Nov-18
Jan-19
Mar-19
May-19
Jul-19
Sep-19
Nov-19
Jan-20
Mar-20
May-20
Jul-20
Sep-20
Nov-20
Jan-21

AmInvestment Bank Bhd 3

LPI Capital 4 Feb 2021

EXHIBIT 4: FINANCIAL DATA

Income Statement (RMmil, YE 31 Dec) FY19 FY20 FY21F FY22F FY23F

Operating revenue 1,603 1,622 1,685 1,751 1,820

Gross written premium 1,524 1,551 1,614 1,676 1,740
Gross earned premium 1,496 1,531 1,590 1,650 1,714
Premium ceded - 485 - 515 - 534 - 553 - 573
Net earned premium 1,012 1,016 1,056 1,097 1,140
Investment income 106 91 96 101 106
Gain on financial assets 0 0 0 0 0
Commission income 102 113 111 109 107
Other operating income 0 0 0 0 0
Other income 7 6 7 7 7
Net claims - 445 - 419 - 433 - 447 - 453
Commission expense - 171 - 175 - 179 - 180 - 181
Management expense - 199 - 200 - 208 - 216 - 225
Other expenses - 370 - 376 - 387 - 396 - 406
Operating profit 414 432 448 470 502
Finance cost -1 -2 -1 -1 -1
Share of profit from associates 2 3 2 2 2
Profit before tax 415 434 449 471 503
Tax - 92 - 97 - 100 - 105 - 112
Net profit 322 337 349 366 390
Core net profit 322 337 349 366 390

Balance Sheet (RMmil, YE 31 Dec) FY19 FY20 FY21F FY22F FY23F

Cash & deposits with FIs 186 151 260 148 173
Loans & receivables 1,540 1,169 1,195 1,222 1,249
Insurance receivables 150 164 163 163 163
Investment securities 1,266 1,852 1,926 2,228 2,413
Investment properties 28 28 27 27 27
Deferred acquisition cost 44 44 45 46 47
Fixed assets 7 6 5 4 4
Other assets 826 1,107 1,138 1,168 1,195
Total assets 4,046 4,520 4,759 5,006 5,270
Insurance contract liabilities 1,807 2,168 2,254 2,342 2,435
Insurance payables 93 100 106 111 117
Borrowings 47 44 47 47 47
Deferred tax liabilities 3 4 6 9 14
Other liabilities 123 128 126 124 122
Total liabilities 2,074 2,444 2,539 2,635 2,736
Share capital 398 398 398 398 398
Reserves 1,574 1,677 1,822 1,973 2,136
Shareholders' funds 1,972 2,075 2,220 2,371 2,534

Key Ratios (YE 31 Dec) FY19 FY20 FY21F FY22F FY23F

ROE (%) 15.6 16.6 16.2 15.9 15.9

ROA (%) 7.8 7.9 7.5 7.5 7.6
Growth in gross earned premium (%) 5.8 2.3 3.8 3.8 3.8
Growth in net earned premium (%) 8.7 0.4 3.9 3.9 3.9
Core net profit growth (%) 2.6 4.5 3.6 4.9 6.7
EPS growth (%) 2.5 4.5 3.6 4.9 6.7
Book value per share growth (%) - 8.7 5.3 7.0 6.8 6.9

Key Assumptions (YE 31 Dec) FY19 FY20 FY21F FY22F FY23F

Reinsurance ratio (%) 32.4 33.7 33.6 33.5 33.4

Retention ratio (%) 67.6 66.3 66.4 66.5 66.6
Claims ratio (%) 43.9 41.2 41.0 40.7 39.7
Commission ratio (%) 6.8 6.1 6.5 6.5 6.5
Management expense ratio (%) 19.1 19.7 19.7 19.7 19.7
Combine ratio (%) 69.8 67.1 67.2 66.9 65.9
Investment yield (%) 8.2 4.8 4.9 4.5 4.4
Underwriting margin (%) 29.6 32.9 32.8 33.1 34.1

Source: Company, AmInvestment Bank Bhd estimates

AmInvestment Bank Bhd 4

LPI Capital 4 Feb 2021

DISCLOSURE AND DISCLAIMER

This report is prepared for information purposes only and it is issued by AmInvestment Bank Berhad (“AmInvestment”) without
regard to your individual financial circumstances and objectives. Nothing in this report shall constitute an offer to sell, warranty,
representation, recommendation, legal, accounting or tax advice, solicitation or expression of views to influence any one to buy
or sell any real estate, securities, stocks, foreign exchange, futures or investment products. AmInvestment recommends that
you evaluate a particular investment or strategy based on your individual circumstances and objectives and/or seek financial,
legal or other advice on the appropriateness of the particular investment or strategy.
The information in this report was obtained or derived from sources that AmInvestment believes are reliable and correct at the
time of issue. While all reasonable care has been taken to ensure that the stated facts are accurate and views are fair and
reasonable, AmInvestment has not independently verified the information and does not warrant or represent that they are
accurate, adequate, complete or up-to-date and they should not be relied upon as such. All information included in this report
constituteAmInvestment’s views as of this date and are subject to change without notice. Notwithstanding that, AmInvestment
has no obligation to update its opinion or information in this report. Facts and views presented in this report may not reflect the
views of or information known to other business units of AmInvestment’s affiliates and/or related corporations (collectively,
“AmBank Group”).
This report is prepared for the clients of AmBank Group and it cannot be altered, copied, reproduced, distributed or republished
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If any provision of this disclosure and disclaimer is held to be invalid in whole or in part, such provision will be deemed not to
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AmInvestment Bank Bhd 5