On behalf of the Board of Directors, I am pleased to present the Annual Report of Labuan Reinsurance (L) Ltd for the year ended December 31st 2017.
In 2017, the global economy witnessed an upswing in economic activity recording growth of 3.7% (2016: 3.1%) on the back of a rebound in investment, manufacturing activity and trade activities. Global growth was supported by rising profits and improved business sentiment across the advanced economies and the emerging market developing economies. The economy of the United States (US) recovered at a faster pace driven by higher investment and strong consumption activities. Meanwhile, the International Monetary Fund (IMF) reported that Europe’s economy continued to firm up and broaden across the region, driven by buoyant domestic demand. In Asia, China’s economy recorded stable growth as a result of a supportive macro-policy mix, stronger external demand and progress by way of domestic reforms. Global inflationary pressure, however, remained stable as the rise in the price of oil in 2016 was not repeated in 2017.
On the domestic front, Malaysia recorded robust growth of 5.9% in 2017 (2016: 4.2%) reflecting the nation’s resilience and its ability to capitalise on the global economic turnaround. The key highlight for the year was the rebound in gross exports, which grew by 18.9% (2016: 1.2%) mainly due to higher demand by major trading partners such as the US, Europe, China, Japan and other ASEAN nations. Domestic demand served as the key driver for Malaysia’s overall strong economic performance in 2017, backed by the upswing in the global technology cycle, investment expansion in the advanced economies and the turnaround in commodity prices. The year saw the Malaysian Ringgit, together with most regional currencies, strengthening against the US Dollar.
The 2017 Aon Benfield Annual Report on Weather, Climate and Catastrophe Insight indicated that global insured losses from natural catastrophes in 2017 amounted to USD134 billion. Meanwhile the economic losses from 2017’s events were valued at USD353 billion – the second costliest in the history after the record losses of USD486 billion in 2011 arising from the earthquakes that struck Japan and New Zealand. The losses from the three hurricanes, namely Harvey, Irma and Maria (HIM), contributed about 60% of the total losses in 2017. Other natural catastrophes during the year included the wildfires in California, earthquake in Mexico, Typhoon Hato in Hong Kong, and floods in China.
Based on the latest reports by the major reinsurance brokers and AM Best, traditional reinsurance capital at the end of 2017 increased by 2% to USD605 billion as compared to the previous year. Meanwhile, alternative capital grew by almost 10% to USD82 billion despite the draw-down of some catastrophe bonds, collateralised reinsurance and retrocession layers affected by HIM. Moving forward, the market is expected to remain competitive in 2018.
As a consequence of this challenging environment, the Group generated an operating revenue of USD196.2 million (2016: USD162.2 million) and a net profit of USD9.4 million (2016: USD9.9 million) during the financial year ended December 31st 2017. While the losses occurred in the Lloyd’s business in particular were quite overwhelming, nevertheless the profits from the Non-Lloyd’s business turned the Group’s bottom line around.
On November 30th 2017, A.M. Best reaffirmed the Company’s Financial Strength Rating of A- (Excellent) and Long-Term Issuer Credit Rating of “a-”. The outlook for both ratings is “stable”. These ratings acknowledge Labuan Re’s strong risk-adjusted capitalisation and balance sheet strength, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management features.
The Group registered a gross written premium (GWP) of USD187.2 million in 2017, an increase of 21.6% from the USD153.9 million recorded in the previous year. The Lloyd’s portfolio turned in a GWP of USD94.3 million in 2017, an increase of 29.4% from 2016, whilst the Non-Lloyd’s portfolio recorded a GWP of USD92.9 million in 2017, an increase of 14.7% from the previous year. This growth in premium income was mainly attributable to the higher premium from the Conventional business of USD4.3 million and the Retakaful business of USD7.6 million.
The GWP from China was higher by USD1.9 million as compared to 2016 mainly due to the late consolidation of 2016’s premium into the Company’s 2017’s accounts. This was caused by the introduction of China’s new fiscal policy (VAT) in 2016. Turkey also performed better, turning in a USD2.3 million rise in GWP performance which was mainly attributable to a new Treaty business. There were also continued improvements in our Non-Lloyd’s business performance which led to stronger underwriting profits. The Non-Lloyd’s business is expected to grow steadily on the back of a careful and selective underwriting approach as well as efficient claims management.
The Lloyd’s business contributed 50.4% of the Group’s premium, followed by the Non-Lloyd’s Overseas business at 27.6%, and the Non-Lloyd’s Domestic business at 22.0%.
Net claims incurred at the Group level in 2017 came in at USD93.3 million (2016: USD75.6 million), higher by 23.4% as compared to last year. Meanwhile, Lloyd’s incurred net claims were at USD53.3 million (2016: USD28.9 million), an 84.4% increase over the preceding year. The losses were mainly from the HIM Atlantic hurricanes with Harvey chalking up USD10.5 million, Irma – USD7.3 million, and Maria – USD1.4 million. Most Domestic business losses were notably from several fire losses, while the Overseas business was mainly affected by explosion damage to the Ruwais Refinery in Abu Dhabi which amounted to a total loss of USD7.9 million.
In 2017, the Retakaful Division registered a gross retakaful contribution of USD15.9 million, an increase of 91.6% from a year earlier, mainly from key markets such as Pakistan, Turkey and Malaysia. However, the Division recorded an underwriting deficit of USD1.2 million as compared to a surplus of USD2.4 million in 2016. The key retakaful markets for the Company continued to be Malaysia, Pakistan, Brunei and Kuwait. These markets remained soft as there was no catastrophic loss to drive the pricing upwards. The growth in this segment in the recent years had led to fierce competition between the existing takaful operators and the new window operators.
The Company’s retrocession programmes continued to provide adequate protection to the Non-Marine, Motor, Marine, and Energy portfolios. The programmes were led and supported by reputable securities, with 95% in the A-rated category. Additionally, the Company purchased an “Aggregate Excess of Loss Protection” as a means to mitigate the losses from the main retrocession programmes. The Aggregate Excess of Loss protection was also led by reputable securities, with 100% in the A-rated category.
The Group’s total capacity participation in the Lloyd’s syndicates was at USD71.8 million (2016: USD68.1 million). The increase was mainly from the participation in four new syndicates, whilst one syndicate was not renewed due to the change in its strategy for third party capital provider. The Group continued to sustain its Lloyd’s business by participating selectively in syndicates which met the Group’s risk-return appetite, as well as in those which could offer business synergies.
The Group’s investment income increased by 8.4% to USD9.0 million, from USD8.3 million in 2016. This performance was buoyed by the positive equity market performance which in turn was boosted by strong economic expansion in the developed economies as well as in Malaysia.
The Group continues to uphold a conservative investment philosophy. As at the end of 2017, our asset allocation stood as follows: 58.5% (2016: 51.8%) in bonds; 26.5% (2016: 32.8%) in cash deposits; 11.9% (2016: 12.8%) in equities; and 3.1% (2016: 2.6%) in other investments.
Outlook for 2017
Global economic growth is expected to remain robust in 2018, as both the advanced and emerging economies are showing a co-ordinated recovery. The risks of intermittent financial market volatility will likely persist from the threats of escalating trade and geopolitical tensions. The IMF has projected that global GDP growth will inch higher to 3.9% in 2018 and 2019 (2017: 3.7%). This will be supported by both consumer and business confidence which have turned more upbeat and which are generating greater capacity to consume and invest (after years of pent-up demand following the recovery from the global financial crisis of 2008 and the Eurozone sovereign debt crisis in 2010).
The current trade war between the US and China is mainly the result of protectionist policies. Intent on using a trade law to claim that steel and aluminium imports are a threat to national security, President Trump has begun imposing trade barriers such as tariffs and quotas on China. As China hits back with its own retaliatory measures, global tensions continue to escalate with the entire global trading system at risk.
At the 14th General Election in May 2018, Malaysia entered into a new era when Pakatan Harapan, led by the former Prime Minister Tun Dr Mahathir Mohamad, brought a monumental and peaceful end to six decades of uninterrupted rule by Barisan Nasional. Notwithstanding this change in the ruling party, Malaysia’s economic outlook remains positive as its financial sector remains strong, while its monetary and financial conditions are supportive of economic growth.
With the UK set to leave the European Union (EU) in March 2019, Labuan Re’s Management is mindful of the uncertainties surrounding the ongoing Brexit negotiations between the UK government and the EU. Given Lloyd’s 14% exposure to the EU Insurance and Reinsurance market, Management is monitoring preparations for Lloyd’s markets along with the general market conditions to identify if it is appropriate to make any changes to the current strategy of the Company.
Lloyd’s has taken some focused initiatives for 2018, one of which is to take a more risk-based market oversight approach as the market is overly burdensome and not sufficiently supportive of profitable business opportunities. Lloyd’s is also exploring ways to make it cheaper and easier for customers to reach its markets, as well as looking at ways to encourage innovation across its markets.
In order to minimise the risks after 2017’s hurricane losses, Management has purchased Stop Loss Protection to protect the Lloyd’s business against excessive losses in 2018. In addition, exposure to the Lloyd’s business will be capped at 50% (+/-5%) of the Group’s Gross Premium.
Shaping a Sustainable Future
At Labuan Re, we believe in shaping a sustainable future for the Group as well as our clients and stakeholders. We have a history of resilient and reliable business conduct and this has played a significant role in the success of our Company.
Our business strategy focuses on profitable growth and we have set ambitious targets for 2018. This requires us to become a high-performing organisation focused on improving and creating value for our clients and stakeholders.
To this end, we are continuously reviewing our processes and systems to satisfy the requirements of a sustainable business and to meet all compliance standards. All our business segments are responsible for the management of sustainability-related risks in their respective operations, while the various business functions are accountable for reviewing their policies, procedures and current practices as well as for keeping their documentation updated.
Many parties have helped us in our journey to success and I would like to acknowledge their contributions. On behalf of the Board of Directors of Labuan Re, I wish to convey my thanks to our shareholders, clients, broking partners and the Office of the Director-General of Labuan Financial Services Authority for their continued trust and support, especially in the face of a challenging year. I am also appreciative of the invaluable guidance and relentless assistance extended by my fellow Directors throughout the year.
My heartfelt gratitude goes to all Labuan Re staff for their dedication, passion and tireless contributions in helping build Labuan Re into a stronger organisation that can endure challenging circumstances and deliver a sustainable performance.
I call upon all our stakeholders to lend us their steadfast support as we venture forth to overcome all challenges and seize the opportunities that the year may bring.
Labuan Reinsurance (L) Ltd