According to paultan.org, the new motor tariffs are expected to go live on 15 Feb. Consistent with our view, the quantum of hike is likely to be immaterial to both customers and general insurers. We also believe the impact  of  GST  on  general  insurers  will  be  neutral  towards  2015. Maintain OVERWEIGHT as the sector will ride on the stronger economic outlook. We still like insurers with a profitable retail product mix.

Impact of higher motor tariffs insignificant. The proposed motor tariff schedule  for  2014  is  expected  to  be  effective  from  15  Feb.  The  tariff increase is no surprise, as this is part of Bank Negara Malaysia (BNM)’s new motor cover framework covering the gradual revision of motor tariff premiums  beginning  from  Jan  2012.  The  premium  adjustment, consistent with previous hikes, is structured to be of marginal impact on customers.  We  retain  our  view  that  the  hikes  will  only  marginally  affect insurers’ topline growth, based on observations that: i) there is no distinct correlation  between  a  tariff  hike  and  industry  motor  insurance  premium increase (before and after 2012 when tariffs started to move up), and ii) the  impact  of  higher  tariffs  on  industry  motor  premiums  (private  cars only)  growth  alone  is  marginal  at  <1%,  assuming  the  number  of  private cars grew 2.2%, and an average MYR13 rise in private car tariffs.

GST impact? We believe it is still too early to ascertain the impact of the Goods  and  Services  Tax  (GST)  tax  on  sector,  as  the  new  tax  will  be implemented  in  April  2015.  Among  general  insurers/takaful  players  (for which  GST  is  standard-rated),  we  believe  the  impact  will  be  neutral  as GST will replace the current 6% services tax. Input taxes arising from the acquisition  of  goods  and  services  are  claimable.  As  for  life insurers/family  takaful  players  whose  customers  will  be  exempt  from GST,  they  may  still  have  to  raise  their  new  product  prices  to  absorb GST-related  costs  since  business  input  is  unlikely  to  be  claimable,  as well as to avoid margin squeeze. Insurers that rely heavily on distributors like agents may also see higher costs relating to GST implementation in the next few years, but these are likely to be non-recurring.

Maintain OVERWEIGHT on the sector, which comprises largely general insurers. Despite waning consumer sentiment, the sector  should benefit from  greater  business  momentum  in  Malaysia.  Our  BUY  calls  on  LPI Capital (LPI MK, BUY, FV: MYR20.00), and Tune Ins Holdings (TIH MK, BUY,  FV:  MYR2.40)  are  premised  on  superior  margins  due  to  a profitable  product  mix  of  fire  and  travel  insurance.  We  also  advocate  a BUY on Syarikat Takaful Malaysia (STMB MK, BUY, FV: MYR12.00) for its  leadership  in  the  fast-growing  takaful  industry.  STMB  is  still inexpensive relative to its peers with similar market capitalisation.

Risks.  i)  Slower-than-expected  GDP  growth  may  depress  revenue growth,  ii)  an  unexpected  hike  in  claims  and  expense  ratios,  and  iii) adverse industry developments in the run-up to detariffication of fire and motor insurance in 2016 that may result in irrational competition.

 The proposed GST may put upward pressure on the premium pricing of life insurance products. For general insurance, the impact is 
expected to be neutral as the GST will replace the 6% service tax

The proposed 2014 tariff hike on motor vehicles is of minimal impact to both customers and general insurers’ profitability

For instance, the tariff impact on industry motor premiums (private cars only) growth alone is only marginal at <1%, assuming: i) 2.2% growth in private cars, and ii) average private car tariff hike of MYR13. Motor premiums were approximately at MYR6.98bn as at 2012.

Source: RHB