Operating Environment

Last year, climate-related events continued to ravage the industry. Events such as the Dubai Floods which occurred on April 16th, 2024 reminded us that climate change is real. Hualien Earthquake (Taiwan), Typhoon Gaemi (Philippines), Typhoon Yagi (South China), Hurricane Milton (US) were also examples. Malaysia again experienced flooding disasters in Kelantan and Terengganu, albeit causing less insurable losses than the December 2021 and March 2022 event.

On economics, geopolitical tensions and uncertainties from the US Presidential Elections created volatile environment for the capital markets. While inflation appears to have slowed down, its impacts were semi-permanent with rising prices of goods & services. This would have effects on insurable interests such as sum insured of buildings and loss of revenue or profits for contingent business interruption insurances.

Closer to home, Malaysia’s government continues to rationalise its subsidies. Diesel subsidies had been removed in 2024 and RON95 fuel subsidies are planned to be removed in 2025. Along with other factors, both domestic and global, puts pressure on the livelihood of the people. Knock-on effects from the above are rising demand for increased wages to cope with the increased cost of living.

Group Performance

Labuan Re reported net profit of USD 26.7 million, higher than the USD 24.0 million net profits registered in 2023.

Underwriting

The Group’s insurance contract revenue rose by USD 29.5 million to USD 161.7 million from USD 132.2 million, a 22.3% growth. The insurance service result saw a decrease to USD 16.2 million from USD 24.6 million in 2023. However, when considered with the net insurance financial result, the net insurance result decreased by USD 0.3 million to USD 12.7 million from USD 13.0 million in 2023. This is because the MFRS 17 captures the economic effects of interest rates and foreign exchange rates in the insurance contracts measurement. As noted above, 2024 continued to be volatile and this is reflected in the financial statements.

Fundamentally, the underwriting results were driven by a resilient and disciplined risk taking. This is accomplished via a defined risk appetite, underwriting exposure analysis and a proactive approach to portfolio management, enabled via a real-time dashboard that allows our underwriters to know the risks’ historical and current performance at a click of button. As the majority of our contracts are on following basis, we are essentially a price taker, largely confined to evaluating whether the terms and conditions are acceptable based on our risk appetite and each individual contract’s contribution to our goal of having a sustainable portfolio. The Group had been selective and careful in its participation in the syndicates at Lloyd’s as guided by the principle of sustainable profitability. The Group maintained its participation in 4 profitable syndicates but will continuously look at expanding its participations as long as these “new” syndicate(s) have territorial and class diversification effects to our overall portfolio.

Investment

Our full year interest income yield had remained healthy at 3.6% despite the 100bps rate cut by the Federal Reserve. The Group’s interest and dividend income rose by USD 2.8 million to USD 14.3 million from USD 11.5 million in 2023. This is driven by the portfolio allocation to investment grade corporate bonds that pays higher coupons, and the higher dividend received from equity investment. The marked-to-market securities registered a fair value gain of USD 8.4 million in 2024 compared to a fair value gain of USD 7.2 million in 2023.

Capital

Labuan Re’s capital position remained strong, with the Insurance Capital Adequacy Framework (ICAF) ratio being above the Internal Target Capital Level as of 31st December 2024. Across the industry, there has been significant focus on the robustness of reserves given social and economic inflation trends. The Board, through the Audit Committee, and along with our auditors and in-house appointed actuary, engaged with Management to discuss the reserving process, key trends and underlying assumptions. We are pleased with Labuan Re’s thorough, consistent and prudent approach to reserving and the confidence that Management has in the Group’s reserves which is at the 75th percentile. All these factors support the Board of Director’s decision to propose a 6%
dividend payout amounting to USD 9.0 million.

Environmental, Social & Governance (ESG) and Sustainability

Labuan Re remains committed to ESG initiatives and sustainable practices. While Labuan FSA still does not require any ESG reporting to be made currently, the Group is proactively addressing these evolving regulatory requirements.

We conducted internal reviews with the Management and with a consultant’s input, derived several metrics to be disclosed. Material matters such as ESG scoring for investment management and climate-related exposures were identified and disclosed.

In addition to known risks, the Board remains focused on managing and mitigating new and evolving risks. The current geopolitical environment brings increased risk across our business but also provides opportunities for Labuan Re to help manage this volatility. The Board brings a diverse set of skills from across industries and depth of management experience which we employ to guide management as they execute the Group’s strategy in this uncertain environment.

Outlook for 2025

In November 2024, AM Best had maintained a positive outlook for the global reinsurance industry underpinned by good profit margins, no new market players to disrupt market discipline and strong demand for reinsurance cover due to heightened natural catastrophe loss activity and general economic and political uncertainty.

The January renewals signaled flattish rate changes, and some loss-free accounts are getting rate reductions. It is anticipated that the underwriting cycle will gradually evolve into a much softer cycle compared to the 2022 and 2023 financial years and we continue to emphasize underwriting discipline and most importantly to our clients – a consistent approach as their reinsurance provider. When we are able to manage the underwriting cycle and deliver a sustainably profitable portfolio it enables Labuan Re to build on its strengths: partnering with our clients to provide sufficient risk-transfer capacity, aligned with our tagline, “Your Partner in Growth, Your Safeguard Against Risk”.

At our core, we are an underwriting company, dedicated to the art and science of taking risk. Recognizing that the receipt of premiums is well before losses are paid, and such economics, unique in the insurance world and called “float”, Labuan Re strategically deploys its float in opportunistic investments in high-grade corporate bonds and marketable securities.

While the Group remains committed to its strategic objectives, which are (1) delivering positive underwriting results, (2) providing sustainable investment income, and (3) strengthening the Shareholders’ Fund, the recent escalation of the Middle East conflict underscores the need for constant vigilance to global events. Compounded by the existing Russia –Ukraine conflict, political risk exposures and its impact on the global economy would inadvertently affect all classes of business. E.g. For property, higher inflation would result in higher reinstatement costs, increasing petrol prices would impact logistics, transit costs. Labuan Re continues to monitor global trends by ensuring diversification in territories, classes of business including its channels of distribution to manage potential disruptions in our business.

The Role of Portfolio Construction

Delivering both positive underwriting results and positive investment income requires one to understand that it’s not about solely maximizing expected profitability. One needs to consider the risk taken to achieve the required return. At the Group level, we ensure there’s sufficient amount of capital needed to cover probable losses with a sufficient margin of safety. This translates to risk management strategies at the underwriting and investment operations.

In underwriting, the portfolio was and still is predominantly property catastrophe which has high risk but also higher expected returns, i.e. the risky assets. We then expanded into lines of business beyond property catastrophe, organically, such as casualty and marine. This new efficient frontier allowed the Group to generate a more optimal risk-adjusted return on capital through diversification of mix of business. We will continue to pursue diversification with other lines of business albeit in a disciplined way to ensure a more balanced portfolio.

As a Group, the underwriting risk is traded-off with investment risks – such as market and credit risks. The strategy of investing only in high-grade corporate bonds and marketable securities seeks to minimize volatility whilst achieving reasonable rates of return.

The combination of diversified underwriting income and investment income enhances expected risk-adjusted returns, focusing on our long-term goal to deliver superior long-term returns to the Shareholders.

Acknowledgement and Appreciation

I take this opportunity to thank our staff for their diligence and hard work, and for the commendable performance achieved this year despite the tough operating environment. Together, we are building a better Labuan Re which will strive to deliver value for its clients and shareholders. I would also like to express my sincere appreciation to all the shareholders, ceding companies, broking partners and the Office of the Director-General of Labuan FSA for their continuous support to Labuan Re. The Board has appointed Encik Zaid Aziz Ibrahim as the Group’s Chief Executive Officer succeeding Puan Johana Era Zainudin, who concluded her tenure on 31st December 2024.

I would like to express my gratitude to Puan Johana for her leadership and contributions and wish her all the best in her future endeavors.

In addition, a note of heartfelt thanks is due to Encik Balyan Suleiman for his contributions to Labuan Re. I welcome his replacement, Encik Mohd Effendi Mohd Nawi from Petronas.

Finally, I wish to record my appreciation to all my fellow Directors for their relentless assistance, support and guidance during the year.

Thank you.

George Oommen