LPI : A Reliable and Steady Company

Basic information:
No of outstanding shares: 137 mln
Market Capitalization : 1.3 bln
2009 Consensus EPS: 0.8
PER(2009) : 12.4X
DY: 0.8/9.95 = 8%

LPI is in general insurance business. Fire and motor insurance take up almost 64% of their business. Underwriting surplus wise, almost half of it is coming from fire insurance.



What I like about their business model is making money from underwriting and not generating income from float. Underwriting margin has been consistent at 20%. Beside conservative underwriting, they have been working hard on customer retention and branding. Net retention for 2008 was 66% vs 60% in 2003. Business reference from Public Bank is an added advantage. Productivity has been high, no of policies issued per employee jumped by almost 30% ( 2007: 1473 vs 2008 1901). The other good sign is gross premium income per employee, it was RM 647 k in 1999 but almost doubled to RM 1.1 mln in 2008. Their management has been very hands on and many of them have been serving the company for a long time. When you have long serving employees that can deliver continuous growth, it is quite safe to conclude the management track record is quite proven.



Financial strength is important asset post-credit crunch era. Their capital adequacy ratio has been way above Bank Negara requirement of 130%, LPI CAR stood at 181% in 2008. With some of the regional giants are scaling back, this is an opportunity to expand capacity and margin. Beside organic growth, regional growth by coat-tailing Public Bank in Cambodia should generate reasonable growth over long term.

LPI assets have been growing steadily to almost 800 mln. 84% of the assets are in investment. Almost 67% in Fixed Deposit, 16% in Fixed Income ( Government Bond and Corporate bond) and remaining in equity. Most of the equity is Public Bank which generating almost 30 mln dividend (non-insurance investment income). Balance sheet is quite clean and able to meet any obligation for any claim payout.

One area needs to watch out is the share price has been very tightly correlated to Public Bank. LPI share price can slide when Public Bank is under pressure.



The other caveat is funding cost can go up when inflation begin to creep in during recovery stage. But more immediate concern is dividend income can come under pressure when Public Bank confronted by weak economy or decides to preserve capital.

The past year growth has been impressive. However, with conservative expectation, if LPI is able to grow net income around 10% per annum for the next ten years, share should worth between RM 8 - 9. Buying below these values together with steady dividend(unbroken dividend record since listed in 1993), investment return should be quite satisfactory.